KUALA LUMPUR: Moody’s Investors Services says Malaysian banks’ asset risks will increase while their profitability decline amid deteriorating economic conditions in the next 12-18 months.
Hence, Moody’s changed its outlook for the local banking system to negative from stable.
Nevertheless,, the firm said the banks’ robust loan-loss reserves and capitalisation would provide a buffer against growing risks.
The government’s willingness and capacity to support the local banks would remain strong, Moody’s added.
“Malaysia is facing slowing regional growth and trade, while the coronavirus outbreak and subsequent lockdowns that have been in place since mid-March are materially disrupting economic activity.
“This will hurt country's electronics exports and tourism in particular. In addition, political uncertainty will weigh on business and investor sentiment,” Moody’s said in a report today.
The firm said Malaysian banks’ asset quality would deteriorate, driven by impairments of loans to export-oriented manufacturers, and companies in the leisure, tourism, hospitality and aviation sectors because of challenges stemming from coronavirus-related disruption.
Bank Negara Malaysia's blanket six-month moratorium on loan repayments for retail borrowers and small and medium enterprises would soften the near-term credit negative impact on asset quality, it added.
“Banks will maintain strong loss-absorption buffers, and this will help mitigate increasing asset risks”.
Moody’s said the banks' internal capital generation would decline as their profitability weakens. However, weaker loan growth would limit expansion of banks’ risk weighted assets, resulting in stable capital ratios.
The firm said the banks' loan-to-deposit ratios would be stable as deposit and loan growth would broadly match.
“Banks will continue to hold sufficient liquidity to withstand liquidity shocks,” it added.