NPLs To Rise For Malaysian Banks As Political Uncertainty Adds To COVID-19 Blow

S&P Global Ratings March 5, 2020

S&P Global Ratings said that it expects slower credit growth and a higher nonperforming loan (NPL) ratio for Malaysian banks amid challenging operating conditions. They believe banks are facing a multitude of headwinds from a position of strength, supported by their solid performance in 2019.

“The global outbreak of COVID-19 and renewed domestic political uncertainty add obstacles for Malaysian banks, which are already grappling with the effects of a slowing economy and dampened investor and consumer sentiments over the past year, said S&P Global Ratings credit analyst Nancy Duan.

“We are revising down our credit growth forecast for these banks to 1-3 percent in 2020, from the previous 3-5 percent. We now expect NPLs to reach 1.7-1.8 percent of outstanding loans this year, versus 1.5 percent as of Dec. 31, 2019.”

The forecasts are based on the assumption that the global COVID-19 outbreak will subside and the domestic political stability can be restored over the coming months. S&P will need to revisit their numbers if those risks stretch beyond the second quarter of 2020.

In their view, the government’s recently announced credit relief measures could buy some time for the sectors most disrupted by the coronavirus outbreak. For example, borrowers in vulnerable sectors will be granted extensions on repaying interest or principal on loans. However, in some cases this may just push out asset-quality weakness into 2021.

They also expect more potential easing from the central Bank Negara Malaysia to shore up the economy, leading to a further 5-10 basis point compression of banks’ net interest margin (NIM) in 2020. Their base case assumes stable capital adequacy ratios. However, risks are now tilted to the downside, given added drains on profitability and the rising dividend payouts announced by some banks last week.

They expect a generally neutral impact to domestic banks from the RM20 billion stimulus package. Even before the government’s stimulus package, the country’s banks had rolled out their own programs to provide relief to struggling corporate borrowers. Supportive policies in the package could strengthen lifelines to banks’ affected clients. However, they feel the special credit facility of RM2 billion is more symbolic than material, and that credit demand will weaken visibly, especially over the first half of 2020.

Transitory asset-quality problems could become permanent if the severity and duration of the disruptions were prolonged. This in turn would eventually push up banks credit costs–meaning the allocation of provisions for impaired and potentially impaired loans. They maintain their projection that sector-wide credit costs will be 20-25 basis points of total loans in 2020, though downside risks are clearly rising.

Malaysian banks’ direct exposure to the most disrupted sectors, such as hotels, restaurants, and airlines, is small at only a single-digit percentage of loan books on average. However, the global health emergency and domestic political upheaval are hitting oil prices, consumer confidence, and the broader economy in Malaysia. They will closely monitor such second-order effects and revise our forecasts as necessary.

Malaysian banks are fundamentally strong, as reflected by their low NPL ratios, light credit costs, and large capital buffers.

“The banks credit profiles have remained solid despite muted profitability in recent years,” said Ms. Duan. “In our opinion, conditions in 2020 will put the banks to a much bigger test to their resilience.”

While there continues to be high uncertainty about the rate of spread and timing of the peak of the COVID-19 disease, modeling by academics with expertise in epidemiology indicates a likely range for the peak of up to June 2020. For the purpose of assessing the economic and credit implications, theye assume the global outbreak will subside during the second quarter 2020, consistent with their report, “Global Credit Conditions: COVID-19’s Darkening Shadow,” published March 3, 2020. As the situation evolves, they will update their assumptions and estimates accordingly.

This report does not constitute a rating action.

S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world’s leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years’ experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.

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