Gross NPLs may hit 9%, says RAM

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KUALA LUMPUR: RAM Rating Services Bhd expects the banking sector’s gross non-performing loans (NPLs) ratio to reach 9% this year at the worst-case scenario amid the global financial turmoil, said its head of financial institution ratings Promod Dass.

Currently, the sector’s gross NPL ratio stands at 4.1%, and net NPL ratio is at 2.2%, complemented by the financial institutions’ strong capitalisation and the industry’s risk-weighted capital-adequacy ratio (RWCAR) and Tier-1 capital-adequacy ratio at a respective 12.6% and 10.5%.

“Net NPL involves a lot of other calculations. Perhaps net NPL would be half of the gross NPL, but we will stick to gross NPL as it is the key indicator,” Dass said at the release of RAM Rating’s Banking Bulletin here yesterday.

RAM Rating said there had been a gradual shift from corporate to retail lending, as banks had been focusing mainly on residential property loans and lending to small and medium-sized enterprises (SMEs).

“Their loan books have become more diversified, reducing the impact of catastrophic events vis-à-vis large, single borrowers on their asset quality as experienced during the previous financial crisis,” Dass said.

On the economic outlook, RAM Rating expects real gross domestic product (GDP) to decelerate to 0.9% this year from a growth of 4.6% last year, which would in turn lead to some measure of deterioration in the asset quality and profitability of the domestic banking system.

Nevertheless, as the banking industry’s asset quality, profitability, capitalisation as well as liquidity were still within healthy parameters, the rating agency viewed the domestic banking as having a stable outlook.

It expects the Financial Sector Master Plan, entering its last phase of development, to pave the way for more liberalisation measures for greater foreign participation in the country’s financial system.

RAM Rating expects more incentives to be given to Islamic banks as part of the government’s continuous effort in developing Islamic banking in Malaysia. The masterplan is a 10-year blueprint, which was launched in March 2001, to develop the Malaysian financial sector through a six-pronged approach.

RAM Rating’s deputy chief executive Chong Kwee Siong said manufacturing, construction, hotel and tourism, shipping as well as residential property were the five worst-hit industries this year due to contractions in demand, prices and profit margins.

Nevertheless, he expected low-cost carriers to provide a boost to the country’s hotel and tourism industry.

Chong added that companies with businesses involved in customer-related products were expected to see healthy demands. He viewed palm oil, oil and gas support as well as power, toll roads and water to have a stable outlook.

Commenting on the bond market, RAM Rating’s chief executive Liza Mohd Noor expected bond issuance to remain low, and that the rating house was looking at RM20 billion to RM25 billion bond issuance this year.

“The first three months are very quiet, particularly dead. Issuers are coming in February and March, and the slow pick-up might be due to frequent holidays. We expect to see more activities soon when the pricing becomes reasonable. It is very clear that there is no lack of interest (for the bond market),” she said.

Liza added that issuers last year were from the banking and infrastructure sectors. She expected issuance this year to originate from infrastructure companies such as water players, tolled road operators and independent power producers.

She is looking for more news and clarity from the authority on the financial guaranteed institute.

This article appeared in The Edge Financial Daily, March 25, 2009.