KUALA LUMPUR (Dec 16): Fitch Ratings has turned the sector outlook for Malaysian banks to negative in 2016, due to greater pressure on earnings and asset quality.

The rating agency said in a climate with persistently low commodity prices, weak external demand and lacklustre domestic sentiment, that it believes there is a risk to the country's gross domestic product (GDP) growth.

Fitch also sees some borrowers facing difficulty in adjusting to the significant currency depreciation over the past 12-18 months.

"We believe these developments translate into lower loan growth and higher credit costs in the next one to two years," it said in a report on "2016 Outlook: Asia-Pacific Banks" released today.

The agency also expects the recent rise in non-performing loan (NPL) formation to continue into 2016.

"The gross impaired-loan ratio — still steady at the long-term low of 1.6% at end-October 2015 — should increase, amid a more challenging environment.

"Delinquencies over the past 12-18 months have largely been from troubled industries offshore such as the commodity sector in Indonesia, but we expect deterioration in banks’ domestic portfolios to emerge in 2016," it said.

Fitch' rating outlooks, however, remain mostly stable, despite the more challenging sector outlook, on expectation that banks’ profitability and other loss-absorption buffers will provide a sufficient cushion against the projected rise in impairment costs, broadly preserving their credit profiles, amid the anticipated downturn.

Nevertheless, Fitch warned that the ratings would face downward pressure due to extended economic weakness, where significantly higher unemployment and a potential pull-back in lending would hurt banks’ asset quality, profitability and capitalisation.
 
"Exports and private domestic demand are the two largest drivers of the economy. Stronger global growth leading to more robust demand for Malaysia’s exports, or a convincing rebound in business and consumer sentiment — without excessive credit growth or inflation — would reduce the risks to GDP and banks’ asset quality," it noted.