Malaysian banks likely to hike dividends despite rising bad loan threat

They have adequate earnings and capital buffers to withstand NPL shocks.

Malaysian banks should be able to pay higher payouts in the next two years, said S&P Global Ratings.

“Stable profitability, strong asset quality, and moderate growth will allow for higher dividend payouts over the next two years, as heavily capitalized banks move toward a more efficient capital structure," said Nikita Anand, credit analyst at S&P Global Ratings.

Anand said that the banks will benefit from a stable economy and steady household finances.

S&P said that rated banks have adequate earnings and capital buffers to withstand non-performing loan (NPL) shocks, based on a simulated stress scenario.

“Small businesses and lower-income consumers could come under pressure in a downside scenario especially if subsidy structures were to change significantly, pushing up bad loans,” S&P said.

In such a scenario, NPL ratios may jump to 5%, a fall in earnings could erode capitalisation buffers, but the common equity tier 1 (CET1) ratio should remain above 12%.

Malaysian banks’ gross impaired loans (GIL) are expected to rise for the whole year, according to an earlier report by CGS International (CGSI). Asset quality is expected to remain resilient against effects of the Middle East conflict. 

The US and Iran’s recent announcement of a framework for a memorandum signals “the first concrete step” towards restoring transit through the Strait of Hormuz, S&P said. However, significant uncertainties will likely remain until the agreement is finalized.

“Even after the strait reopens, the recovery in energy and shipping flows will be gradual. Lower-income households and small businesses are vulnerable to higher living and input costs,” S&P said.

A recent $1.3b support package extended by Bank Negara Malaysia to stablise small and medium enterprises (SMEs) will help prevent a spike in bad loans for its local banks, S&P said in an earlier report.