Malaysian banks' NPLs to rise as political turmoil adds to virus' impact

Asset quality problems may become permanent if disruptions persist.

Malaysian banks’ non-performing loans may reach 1.7% to 1.8% of outstanding loans in FY2020 as the ongoing domestic political uncertainty adds to the global impact of the COVID-19 and slowing economy, reports S&P Global Ratings.

"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," noted S&P credit analyst Nancy Duan.

Credit growth forecasts were downplayed to 1%-3% from the previous 3%-5%.

The government’s recently unveiled credit relief measures could buy some time for sectors most disrupted by the outbreak. However, the added credit pressures may push banks’ asset-quality weakness to extend until 2021, noted S&P.

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, said S&P.

S&P projects that sector-wide credit costs will be 20-25 basis points of total loans in 2020, but noted that downside risks are rising.

A further easing from the central Bank Negara Malaysia may also lead to a further 5-10 basis points (bp) compression of local banks’ net interest margin (NIM) in 2020, assuming 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,” the report added.

Credit demand will also weaken considerably in H1 2020, whilst the special credit facility of MYR2b is more “symbolic” than material, according to S&P.

On the upside, 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.

The forecasts are based on the assumption that the virus outbreak will subside and the domestic political stability can be restored beyond the second quarter of 2020.