Banking sector remains resilient despite uptick in impaired loans — RAM Ratings

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KUALA LUMPUR (Sept 4): The Malaysian banking system’s asset quality remained sturdy although the gross impaired loan ratio (GIL) edged up to 1.6 percent as at end-July 2019 from 1.48 percent as at end-December 2018, said RAM Ratings Services Bhd.

RAM’s co-head of Financial Institution Ratings Wong Yin Ching said the weakness largely stemmed from a couple of lumpy impairments from the agriculture and manufacturing sectors.

“The rise in impaired loans is idiosyncratic in nature and we do not foresee industry-wide deterioration emerging in these two segments.  The GIL ratio at the end of 2019 may slightly exceed our initial expectation of 1.60 per cent but should stay below 1.7 percent.

“At this level, the domestic banking industry’s asset quality continues to compare favourably with regional peers,” said Wong, in conjunction with the release of RAM’s Banking Quarterly Roundup – second quarter (2Q) 2019.

She also noted that the recent second-quarter financial results had shown that the eight anchor banks’ average credit cost ratio remained modest at 27 basis point (bps) in the first half (1H) this year, even after excluding a one-off Malaysian Financial Reporting Standards (MFRS 9) related adjustment by one institution.

In addition, she said banks had maintained healthy loss-absorption buffers with an average GIL coverage ratio of 131 percent (including regulatory reserves) and a common equity tier-1 capital ratio of 13.9 percent.

Wong said the profitability indicators of the majority of the eight anchor banks are still under pressure, with an average pre-tax return on asset (ROA) of 1.33 percent and return on equity (ROE) of 12.9 percent in 1H 2019 (1H 2018: 1.39 percent and 13.7 percent, respectively).

“Domestic loan growth skidded to 3.9 percent year on year (y-o-y) while already-thinning net interest margins (NIM) were crimped further subsequent to the May 2019 overnight policy rate (OPR) cut.

“Lower net interest income, however, was moderated by improved investment and trading income in 1H 2019,” she said.

She noted that NIM might suffer another blow as the probability of an OPR cut later in the year is higher now, given that the worsening trade outlook could heighten downside risks to growth.

Loan applications were sluggish, increasing 0.8 percent y-o-y in July 2019 but on a month-on-month basis, there was a 19.5 percent rebound in loan applications, primarily from households, she said.

“However, it remained to be seen whether the momentum could be sustained, particularly in view of the external uncertainties,” she added.