KUALA LUMPUR (Nov 9): Fitch Ratings said Malaysian banks have sound buffers with adequate system profitability, capitalisation and liquidity, which will help cushion against rising asset-quality, funding and liquidity risks.
The international rating agency said financial and natural hedges also serve to reduce the risk inherent in external borrowings by Malaysian corporates.
"Nonetheless, the weaker credit outlook and a further tightening of system liquidity could test Malaysia's buffers," Fitch said in a statement today.
"We see only a low probability of tighter liquidity conditions leading to sustained credit contraction in Malaysia, but the potential negative repercussions could be significant if this were to occur," it added.
Fitch also noted that there are pockets of risk from an external funding pullback, but it does not expect a broad-based regional crisis.
"Malaysia and Thailand, with their increased reliance on cross-border interbank credit since the 2008 global financial crisis, are more exposed in the event of protracted liquidity tightening. But Fitch expects the pressure on banks to be manageable even in these markets," it said.
Fitch noted that tougher operating environment amid sluggish economic growth, depreciating currencies and softer commodity prices will continue to challenge banks in many parts of the Asean region.
It said currency, credit and liquidity risks are increasingly coming into focus, and asset quality is likely to deteriorate — particularly in Indonesia and Malaysia. That said, most banking systems are coming from a position of strength, and are reasonably well-positioned to manage the likely risks.
"Asean banks are better positioned than prior to the previous regional financial crisis in 1997.
"Banks now rely less on foreign capital, have better hedged their foreign exposures, and have more stringent regulatory frameworks," Fitch said.
From a macro perspective, it added, only Indonesia is running a current account deficit, whereas this was the case with most Asean countries prior to the 1997 Asian financial crisis.
Every large country in the region — barring Vietnam — now also benefits from the flexibility of a floating exchange rate.
Fundamentally, Asean banks have lower non-performing loan ratios, lower loan/deposit ratios, higher capital adequacy ratios and higher loan-loss reserve coverage, it added.
Fitch also noted that one key variable that is less favourable for banking sector stability is a more leveraged household sector, which has increased significantly since 1997.
Notably in Malaysia and Thailand, the debt to gross domestic product ratio had risen to 88% and 80% respectively by end-2014, from 50% and 40% in 1997.
"The risks facing Asean banking sectors are not evenly dispersed. Malaysia and Indonesia are likely to be more affected by the macroeconomic and external environment due to their greater dependence on commodities.
"The ringgit and Indonesian rupiah have depreciated the most since end-2013, and there are pockets of greater risk in specific sectors — especially those related directly to the commodity sector," it added.