KUALA LUMPUR: The banking system’s loan quality, as measured by the gross impaired loan (GIL) ratio, could weaken this year — possibly for the first time in over a decade — on potential stress in the oil and gas (O&G) and property segments as well as certain household segments, said RAM Rating Services Bhd.

The rating agency expects the GIL ratio, which reached an all-time low of 1.6% as at end of 2014 on the back of an expanding loan base, to move up slightly this year.

“Applying conservative assumptions, our stress tests indicate that the system’s GIL ratio could deteriorate to 2.2%-2.5% in 2015, translating to an aggregate RM9 billion to RM14 billion increase in GILs. [However], in contrast to other banking systems within the region, these impaired loans are still manageable,” RAM said in a report on the Malaysian banking sector this month.

It is understood that this could be the first time since 2011 that the GIL ratio is weakening on a year-on-year basis.

RAM, in its report, is maintaining a “stable” outlook on the Malaysian banking system, saying asset quality and capitalisation have remained strong.

RAM’s co-head of financial institution ratings Wong Yin Ching told The Edge Financial Daily that a GIL ratio below 2.5% is still healthy.

“This forecast considers our estimates of the system’s loan exposure to 1Malaysia Development Bhd (1MDB) as well as a potential uptick in GILs from the O&G, property and vulnerable household segments. As RAM does not rate 1MDB, we have relied on information that has been publicly reported in arriving at our estimates.

“In light of banks’ sound capital buffers, we do not expect 1MDB to pose a systemic risk to the Malaysian banking system,” she said.

In the report, RAM explained that this year, the credit quality of financing facilities extended to highly-leveraged corporates in the property and O&G sectors may come under stress due to the tougher operating environment.

It noted there could also be some downside risks to retail loans amid the tougher economic landscape, from facilities extended to the vulnerable household segment. The GIL ratio in the household segment remained robust at 1.2% at the end of 2014 compared with 1.3% a year earlier.

RAM forecasts Malaysia’s economic growth to slow to 5.3% this year after last year’s 6% growth.

“We believe the industry’s credit fundamentals will remain strong and is well poised to withstand the more uncertain environment amid cautious business and consumer sentiments, the more volatile ringgit and uneven global growth. While some sectors may face more challenges, we do not foresee any significant broad-based deterioration in asset quality,” it said.

It expects loan growth to moderate to 7% this year from 9.3% last year. Bank Negara Malaysia will likely hold the overnight policy rate steady at 3.25% this year, although a 25-basis-point increase may be possible if second-round goods and services tax’s inflationary effects become prominent, it said.

Banks will likely focus on the domestic market this year, although opportunities for cross-border growth will still be explored.

“Though the plan to create a mega Islamic bank fell through this year, RAM still sees likely consolidation efforts for smaller Islamic banks, as size will be a key determinant to stay competitive,” Wong said.

This article first appeared in The Edge Financial Daily, on March 10, 2015.