Fitch: 1MDB unlikely to destabilise Malaysian banking system

The exposure of Malaysia's banking system to troubled government development fund, 1MDB, is a manageable risk, says Fitch Ratings.

The nation's banks have reasonably prudent lending practices that ought to limit the potential impact of a default by any single borrower, it said in a statement made available here.

Fitch said there is uncertainty about the level of 1MDB's debt, while market estimates of an upper limit of around RM42 billion (or just over US$11 billion) appears manageable, when compared with the size of the banking system.

"Some of the exposure could be sensitive to currency risk, although these estimates represent about 20 per cent of system equity or three per cent of loans.

"This forms an upper limit for the banks' exposure based on the estimates, since not all of 1MDB's debt is held by the domestic banks," the rating house said.

Actual direct risk to the banking system would be even lower, given that some of the exposure is either guaranteed by the Malaysia sovereign or collateralised in some way.

At the same time, adequate capitalisation and healthy profitability mean Malaysian banks are currently well-positioned to absorb a significant increase in credit costs.

"Their risk management policies including rules set by the central bank that limit lenders' exposure to any one entity should be sufficiently robust to contain the fallout from a large but isolated default," it added.

Fitch explained that the issues at the highly indebted IMDB were idiosyncratic and not indicative of broader systemic risk, but its troubles add to the more challenging Malaysian operating environment in the near term.

The build-up of household debt in the last few years may become a bigger medium-term challenge for the system if real credit growth is not contained and if economic volatility intensifies, it said.

Also, it added that recent commodity and financial market volatility has caused greater uncertainty over the nation's economic outlook, and the gloom was cited as a reason for the cessation of merger discussions between CIMB Group, RHB Capital and MBSB in January.

"We believe that these risks should be manageable for the system without a prolonged economic downturn or significantly higher unemployment, as the government has attempted to address some of these issues with macro-prudential measures and tightened regulations in the past few years," Fitch said.