Government shift, surge in COVID cases drags on Malaysian banks

Credit growth is likely to flatline this year from the record low of 3.9% in 2019.

A change in government and rapid rise in coronavirus cases looms over Malaysia’s banking sector, weighing down on its operating environment and consequently affecting ratings, according to a Fitch report.

Credit growth is likely to drag from the 19-year low of 3.9% in 2019 to practically flatline this year due to the movement-control order and lower commodity prices, analysts Willie Tanoto and Priscilla Tjitra said.

Bank Negara Malaysia has approved $696m (MYR$3b) in low-cost loans to SMEs and the agro-food sectors and undertook 80% of credit risks, but banks are said to be risk-averse so far.
In addition, it also announced a six-month moratorium automatically accorded to all loans in Malaysian ringgit made to individuals and SMEs in good standing.

“As it is automatic, it removes borrower stigma and applicant inertia to ensure high participation. Banks will also be unable to cherry-pick customers, thus maximising its reach to those in need of financing. Rescheduling of corporate loans is also encouraged, but on a case-by-case basis,” analysts said.

The central bank has also lowered the statutory reserve requirement from 3% to 2% to release over $6.9b (MYR30b) of liquidity into the banking system, and has granted banks to run their liquidity coverage ratio (LCR) below 100%. The planned implementation of the net stable funding ratio in July will also proceed but at a reduced level of 80% to ease banks' need to obtain higher cost long-term funding.

Lenders can now tap into accumulated regulatory reserves and dip into capital conservation buffers, but are unlikely to need to do so in the near-term in light of a system core equity Tier 1 Ratio of 14.4% as of end-January, the report said.

The policy rate has been slashed thrice by 75bp over the past year to 2.5%, and looks to match the 2.0% record low in 2009. Interest yields are also under pressure, and net interest margins are expected to shrink by 10bp or more this year.

A drawback of the relief is deferred asset-quality risks for banks as yet-unidentified frailties in the manufacturing, trade, transport and hospitality sectors may complicate almost 20% of exposures and household lending which comprise another 58%, Fitch warned.

Existing general provision buffers are thin, averaging little more than 0.7% of net loans, indicating that incremental credit impairments are likely to have a high pass-through effect on earnings, the report concluded.

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