Malaysian banks' asset quality can recover to pre-pandemic levels by 2023 - S&P

KUALA LUMPUR – Malaysian banks’ asset quality recovery is expected to be protracted beyond this year and is looking at returning to pre-COVID levels by 2023, said S&P Global Ratings, reported Bernama.

South and Southeast Asia (SSEA) Financial Services Ratings director, Ivan Tan said this was because of the delayed economic recovery due to the third wave of COVID-19 which had negatively impacted the banks.

“Another factor is that the proportion of loans under moratorium or restructured loans remain high, about 20% in Malaysia and also Indonesia.

“This also means there will be a delayed recognition of non-performing loans (NPL) which would only crystallise later this year or next year,” he said during a webinar entitled ‘Malaysian Banking Sector Update: A Delayed Asset Quality Recovery Beyond 2021’ on April 14.

Tan added that the recovery forecast was in line with other ASEAN regional peers such as Thailand, Indonesia and the Philippines.

He said the credit ratings agency expects the Singapore banking system, together with Hong Kong and China, would recover to pre-pandemic levels by next year.

“The better control of the COVID-19 pandemic and sharp reduction in loans under moratorium to only about 10% had given us the confidence that Singapore would recover faster than its regional peers,” Tan said.

Meanwhile, SSEA Financial Services Ratings associate director Nancy Duan said Malaysia performed better in terms of moratorium coverage last year, given the automatic moratorium in place for retail and small and medium enterprise credit.

“But Malaysia banks saw a steep decline of the moratorium coverage from 70% in June 2020 as of February this year, with approximately 17 to 18% for businesses and around 11 to 12% from households still under the moratorium,” she said.

Duan added that S&P Ratings is expecting more stresses to come from the agriculture, domestic trade, construction, transport and consumer lending sectors.

With the NPL expected to increase by 2.5 to 3.0% in 2021, Duan expected the NPL to peak next year because of the moratorium delay.

“To contain asset quality stress, Malaysian banks are expected to look at NPL sales more actively, especially for corporate credit.

“Malaysia had utilised this tool since last year, for example, the CIMB group had disposed of RM360 million of its 2020 NPL assets and we expect to see more divestment going forward as Malaysian banks try to clean up their balance sheets.

“An in-house insolvency NPL write-off would be preferred channel for Malaysian banks,” she said.

Malaysian banks, however, are expected to face the current downturn from a position of strength, with their capital position progressively enhanced and liquidity conditions remain supportive in the near term, Duan said.

“We expect the loan growth to be around 6% this year for Malaysian banks, to slightly outperform deposit growth over the next two years.

“Net interest margins and profitability are also forecasting the recover gradually this year,” she added.