Malaysian banks remain cautious about aggressive credit extension while the country’s ongoing loan moratorium obscures the financial health of borrowers and banks’ loan portfolio quality, says Fitch Ratings.
The delay in recognising impaired loans until 2022 may have curbed banks’ appetite for new risk-taking, but a less severe impact on credit costs and profitability should alleviate pressure on some banks’ financial profile scores.
System loan growth in 9M21 remained near a two-decade low of 2.9%, and more than two-thirds of the gross increase in lending since 2019 arose from residential mortgages. Banks continue to park surplus deposit liquidity in government debt securities amid lingering aversion to originating new risk assets.
“We believe such caution is driven by banks’ reduced visibility of how their loan portfolios will perform once the moratorium expires; we estimate that 21% of the six-largest banks’ total loans are under various forms of repayment assistance. A majority of these relief loans are not due to make repayments at all in 2021, making it difficult to assess borrowers’ cash flows,” says Fitch.
Banks also continue to buff up loss-absorption buffers, with credit reserves rising to 120% of impaired loans and 1.9% of gross loans by September 2021, despite the impaired-loan ratio remaining ostensibly low at 1.6%. Banks that are disciplined in loan provisioning can better protect earnings when relief programmes wind down, which may reduce pressure on their ratings.
“We believe Malaysian banks will resume a more confident pace of credit growth only when they have a better grasp of the unembellished performance of their loan portfolios. We do not expect that to occur before mid-2022, when loan relief schemes taper to more manageable proportions.”
