KUALA LUMPUR: MALAYSIAN banks need to monitor their exposure to the property overhang in the high-rise residential, office and shopping complex segments as these could erode their asset quality in an economic downturn, said Malaysian Rating Corp Bhd (MARC).
“Overall, we believe there is no near-term recovery in sight for the property market given the affordability issues, unsold units and a challenging economic outlook.
"Moreover, the banking system has not been tested by a housing downturn since 1998,” MARC said in its Banking Sector Insights report released yesterday.
On the bright side, MARC said government-initiated cooling measures to curb speculation have somewhat helped to contain the risk of a housing bubble.
Last year, residential mortgages comprised over a third of banks’ total retail lending and 44 per cent of household loan growth.
Approved loans for residential properties shrunk by -0.1 per cent and 1.2 per cent in 2018, versus double-digit growth in 2017.
Banks had an average gross impaired loan (GIL) ratio of 1.57 per cent as of end-June 2019, up from 1.45 per cent as of end-2018.
For now, MARC said expansion in residential property lending continues to be supported by employment trends, real wage growth and low-interest rates.
Malaysia’s high household debt level at 83 per cent of gross domestic product (GDP) in 2018 (2017: 84.2 per cent), however, makes households at risk to high unemployment and higher interest rates.
MARC highlighted higher incidents of impairment exhibited by banks’ personal and higher-valued residential property financing portfolios.
These exposures, coupled with the sensitivity of banks’ GIL ratio to economic growth, warrant a more cautious view of banking system asset quality, it said.
Meanwhile, earnings momentum continues to moderate on account of slowing loan growth and squeezed net interest margins (NIMs).
Profits have also come under pressure from the rising cost of risk management and compliance, as the aftermath of the 2008 global financial crisis saw new regulations and financial reporting requirements.
“Unlike past years in which profitability was boosted by high loan loss reserve releases and unusually low credit costs, there are now fewer earnings sources to sustain a strong earnings momentum,” MARC cautioned.
MARC believes revenue growth, rather than credit costs, poses the biggest risk to domestic lenders’ earnings in 2019.
“This year, we believe the banking sector’s ability to grow revenue will be challenged by lower credit growth, the competitive squeeze on NIM and increased credit risks across the board.
“Spread-related income growth is likely to become more challenging as the year wears on, if spreads remain compressed and growth in earning assets provides an insufficient offset.
"The impact will most likely be felt hardest by smaller banks with limited branch networks and undifferentiated branches,” MARC stated.
Banks’ boards and executive management must avoid across-the-board cuts that might result in under-investment.
MARC foresees consolidation and restructuring among banks, amid a rather quiet merger and acquisition scene this year.
“Given the increasingly competitive financial landscape, it is important for banks to proactively enhance their capacities and capabilities.
“Although consolidation is not an immediate necessity given the banks’ resilient performance last year and up to the first half of 2019, mergers would enhance a bank’s operations that may provide better synergies in operations and cost efficiencies,” it said.