Malaysian banks poised to ride out COVID-19 crisis - RAM Ratings

In a statement today, RAM Ratings reiterated its stable outlook on the domestic banking sector underpinned by strong fundamentals.

"We anticipate loan expansion to come in at around three per cent in 2021 with household loans anchoring growth while business loans remain sluggish.

"Auto and home loans which charted strong growths last year will continue to benefit from the various incentives for car and property purchases," said financial institution ratings co-head, Wong Yin Ching.

However, Wong said the projection is subjected to downside risks, such as unexpected delays in the vaccination programme or a new wave of COVID-19 infections, which might necessitate stricter lockdown measures.

According to RAM Ratings, the banking system's gross impaired loan (GIL) ratio stayed benign at 1.60 per cent as at end-January 2021, slightly higher than the 1.51 per cent as at end-December 2019.

It said this ratio is likely to be upheld by the targeted repayment assistance (TRA), which has been made available to individual and small and medium enterprise borrowers following the conclusion of the six-month blanket loan moratorium in September 2020.

"Based on our estimates, the industry's GIL ratio may come up to around 2.3-2.5 per cent in 2021.

"We expect GILs to peak only in 2022, after the expiration of all temporary relief measures," said financial institution ratings co-head, Sophia Lee.

She said banks pre-emptively built up their provisioning buffers in 2020 as they brace for a rough ride when their underlying asset quality becomes apparent in the second half of 2021 or 2022.

The rating agency said Malaysian banks' earnings in 2020 were weighed down by hefty pre-emptive provisions, modification losses and narrower net interest margins (NIMs).

It said NIMs were severely crimped by Bank Negara Malaysia's slashing of the overnight policy rate by 125 bps compounded by modification charges.

"Banks' earnings are anticipated to improve in 2021 with the absence of modification expenses and rejuvenated NIMs as deposits would have mostly been repriced at lower rates," it said.

It added that the overall profitability is likely to remain pressured by elevated impairment charges but the banking system's liquidity position would remain healthy.