RETAIL BANKING | Staff Reporter, Malaysia

Renewed lockdown drags Malaysian banks' recovery to beyond 2021

Whilst impaired loan estimates remain the same, asset quality risks have increased.

Malaysian banks’ path to recovery is now sighted to go beyond 2021, with renewed lockdowns across the country raising asset quality risks, reports Fitch Ratings.

The Malaysian government has reimposed a two-week movement control order (MCO) on all states except Sarawak and has declared a nationwide state of emergency amidst high coronavirus infections. Past experience suggests the MCO is likely to be extended, even if only in a less restrictive form, noted Fitch.

This, along with loan moratoriums being lifted, will push credit impairment to continue rising in 2021. A prolonged lockdown could also renew assault on consumer and business confidence and will most likely aggravate finances at some of the already-weakened sectors, such as food and beverage services, hospitality, retail and transportation, Fitch added.

“The new lockdowns have not caused us to raise our impaired loan projections, unless they prove prolonged, but downside risks to asset quality have certainly increased,” the report said. “We believe credit stress will be more prominent among borrowers in worst-affected sectors and those on the fringes of the credit curve, rather than broad-based defaults.”

Should the lockdown proves prolonged and hurts Malaysia's economic recovery, it will increase downside risks to banks' asset quality and profitability, warns Fitch.

In the near term, credit costs will remain high, pressuring banks' profitability for the rest of the year. Reserves against impaired loans in the system were modest at 1.6% of gross loans at end-November, below the average of 3% in Southeast Asia's six largest banking systems.

On the upside, Malaysian banks’ risks of capital impairment remain manageable amidst high pre-provision profit buffers. Capitalisation is also adequate with a system average common equity Tier-1 ratio of 14.5% at end-November.

The proportion of loans under relief—currently at 10%-15% of the major banks' domestic portfolios in November 2020 and down from a peak of more than 50% in June 2020— could possibly rise again as financial relief gets extended. This will moderate reported impaired loan ratios in the near term but obscure loan quality for even longer.

“Until there is assured visibility that underlying asset quality has peaked, loan growth and earnings recovery may continue to be constrained into at least late 2021,” Fitch added.

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