KUALA LUMPUR (Sept 29): Malaysian banks could see their non-performing loans (NPLs) increase up to 4% of total loans in the near term, S&P Global Ratings said, as provisions for potential credit losses are likely to be pressured over the next one to two years when the loan-repayment moratorium expires by the end of 2021.

Its associate director (financial institutions ratings) for South and Southeast Asia Nancy Duan said Malaysian banks’ credit costs are likely to stay elevated as the extensive moratorium continues, while credit cost normalisation is not expected to occur until 2023.

“We are seeing the [gross] loan growth will grow at 4% [this year], but this is subject to increasing downside risks, and the gross NPL ratio will most likely only stay below 2% given the continuous distortion impact from the second blanket moratorium. 

“Eventually, we believe the gross NPL ratio could grow to a range of 3% to 4% by end-2022 once the current moratorium expires. We see more crystallised asset-quality trends of Malaysian banks only next year,” she said at the rating agency’s webinar titled “Rising Downside Risks for Malaysian Banks” on Wednesday.

In its Financial Stability Review for the first half of 2020, Bank Negara Malaysia said overall impairments are projected to rise above 4% of loans by end-2021, mainly driven by higher business impairments. NPLs in the banking system reached a nine-year high of RM28.7 billion at end-2020, according to BNM data.

Duan said Malaysian banks’ credit costs are likely to increase to above 50 basis points (bps) to 60bps for this year and are likely to maintain at this level in 2022 as well, while noting further that Covid-19’s credit stress for banks in Malaysia is expected to last longer alongside its peers such as Thailand and Indonesia. 

“[Notwithstanding that], Malaysian banks actually still have quite a good buffer compared to its peers like in the Philippines and Indonesia. Before the pandemic, Malaysia actually was placed in a place almost similar to Australia and New Zealand. You could actually see the clear weakening of Malaysia banking sector’s strengths during the pandemic. 

“So now the question is whether the Malaysian banking sector has already hit a bottom in the current credit circle or is likely to give way further,” she said.

Duan pointed out that a delayed economic recovery, repeated moratorium distortion and negative government intervention in earnings/operation could threaten to materially erode the buffers Malaysian banks had before the pandemic. 

“Macro trends such as household deleveraging, an orderly rebalancing of property market and rebuilding of corporate financial buffer and earnings capability affect medium-term asset quality trend,” she added.

Going forward, Duan believes the strength of Malaysia's banking sector in terms of capitalisation and funding support creditworthiness is still quite strong. 

“Strong capital position and funding/liquidity conditions are critical buffers to the downside. We expect loan growth to slightly outperform deposit growth over the next two years,” she added. 

Duan also said high household indebtedness and property market overhang remain long-term challenges that need to be on the lookout for beyond the pandemic. 

“We have seen some consistent improvement in the household deleveraging trend prior to the pandemic, but unfortunately the impact from Covid-19 [on] gross domestic product (GDP) growth has kind of disrupted this.

“Having said that, we continue to believe the household deleveraging trend will continue in the few years and gradually normalise to the pre-pandemic levels,” she said.

Another concern Duan pointed out is that the property market has been in an overhang situation over the past five or six years, and that there has been little progress made in terms of unsold properties and resolving the mismatch between supply and demand for the property market itself.

“Given the overhang stress that still remains elevated is unlikely to be resolved in the next two to three years, we do think that banks could potentially be impacted due to the imbalance from the property market,” she said.