Thursday 28 Mar 2024
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KUALA LUMPUR: International rating agency Moody’s Investors Service views the exposure of Malaysian banks to debt-laden 1Malaysia Development Bhd (1MDB) as credit negative but manageable due to the banks’ sufficient capital buffer.

“Last Thursday, Malaysia’s Prime Minister and Finance Minister [Datuk Seri] Najib Razak, said the country’s banks’ exposure to 1MDB totalled around RM5 billion (US$1.36 billion) as of January 2015. 

“This reported exposure, which marks the first time that the government has publicly disclosed Malaysian banks’ exact exposure to the troubled government-owned development company, is credit negative, but relatively small compared with Malaysian banks’ capital buffers, and the worst-case credit loss would be manageable for the banks,” said Moody’s in a press statement yesterday.

It added that the announcement addresses questions about 1MDB’s potential liabilities to Malaysian banks, “particularly considering that the company’s total debt as at March 31, 2014 was RM41.9 billion, more than eight times the amount of the banks’ exposure”.

“We also understand that bank loans to 1MDB are well collateralised, so any possible losses for the banks will be smaller than their exposures,” Moody’s said.

It also noted that of 1MDB’s total debt, RM5.8 billion (0.5% of gross domestic product [GDP]) was backed by an explicit government guarantee and RM11 billion (1% of GDP) was supported by a government-issued letter of comfort as at March 31, 2014. It added that other borrowings were either collateralised — like those from Malaysian banks — or supported by third-party guarantees, such as from the International Petroleum Investment Corp.

Moody’s does not expect these liabilities to be migrated to the federal government’s balance sheet. 

“However, a RM950 million line of credit, that the Ministry of Finance extended to 1MDB earlier this year, in part to alleviate 1MDB’s liquidity pressures, carries a risk that further government support would materially undermine the fiscal consolidation trend that underpins our positive outlook on Malaysia’s A3 sovereign rating,” it warned.

Moody’s simulated a scenario in which 1MDB defaults and the exposure of every large Malaysian bank is RM2 billion, and that the loss is one-third of that amount, owing to protection provided by collateral.

“We then assess this RM667 million loss against the banks’ common equity Tier-1 ratios. In our scenario, the six large Malaysian banks maintain good capital buffers, with manageable negative effects on their capital ratios,” Moody’s said.

Among the larger banks, Malayan Banking Bhd, Public Bank Bhd and Hong Leong Bank Bhd scored the best in the stress test because of their larger capital bases and higher capital buffers.

However, it noted that this assessment “is conservative because it excludes retained earnings that the banks will likely generate to cover higher loan-loss provisions”.

 

This article first appeared in The Edge Financial Daily, on March 31, 2015.

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