KUALA LUMPUR: ANALYSTS are urging banks to focus on asset quality rather loans growth next year.
Maybank Investment Bank Bhd banking analyst Desmond Ch’ng said banks needed to look beyond loans growth.
“The biggest challenge next year would still be in managing asset quality in an environment of ongoing economic uncertainty, particularly on the external front.
“Domestically, the weaker ringgit and spike in bond yields pose short-term earnings risks in the form of potential mark-to-market losses on investments and borrowings.”
Another analyst from a local investment bank said: “We expect a soft economic environment to continue, which will in turn put pressure on local banks’ asset quality and profitability.
“Banks also need to look beyond enlarging the loans book and seek to ensure that their asset quality remains sound.”
In a research note, global rating agency Fitch Ratings said loan-loss coverage for Malaysia’s top six banks had fallen to some 78 per cent as of September 30, versus 90 per cent as at the end of 2014.
“We believe corporate and offshore portfolios are likely to pose a greater credit risk. Against this backdrop, we expect banks to manage funding and operating costs carefully.
“Pre-provision profit should stay sufficient to absorb higher credit costs, with little risk to capital.”
Fitch, however, pointed out that local banks’ core capitalisation will continue to rise, and the banking sector remains well-capitalised with a transitional common equity Tier 1 ratio of 13.3 per cent at the end of September.
“We expect the banks to retain a more conservative bias in managing capital in the near term, in light of continued economic uncertainty next year and regulatory and accounting updates that may raise capital charges further out.”
Economists are expecting the economy to grow between 4.2 and 4.5 per cent next year.
Even though it is slightly higher than this year, it still reflects the common consensus that economic expansion will remain below the long-run average.
It is set to be another rough year for the local banking industry as the current soft oil and gas sector and subdued external demand appear to persist into next year.