Non-performing loans to rise — S&P

This article first appeared in The Edge Financial Daily, on June 29, 2017.
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KUALA LUMPUR: Malaysian banks may see an uptick in non-performing loan (NPL) ratio as Bank Negara Malaysia (BNM) is expected to raise its overnight policy rate (OPR) twice by end-2018.

Furthermore, the likelihood of a higher unemployment rate may result in more loan defaults, according to S&P Global Ratings.

The rating agency anticipates a 25-basis point (bps) hike in OPR by end-December and another 25bps next year, bringing the rate to 3.5% — a move to catch up with interest-rate normalisation in the US.

The rate hikes are expected to lead to a higher NPL ratio among local banks to between 1.8% and 2%, up from a near-historical low of 1.6%, said S&P financial institutions ratings director Ivan Tan in a conference call yesterday.

Among local banks, Malayan Banking Bhd, CIMB Bank Bhd and RHB Bank Bhd have been among those which have seen increases in NPL ratio since 2015 (see chart).

In terms of asset quality, Malaysia has been better than its regional peers in Asean except for Singapore (see chart), Tan noted. Nonetheless, he warned that oversupply in the commercial property market and a weak oil and gas (O&G) sector will remain as downside risks to the asset quality of Malaysian banks.

Tan also cautioned that the low-interest rate environment has helped lift the indebtedness of corporations and households, which is among the highest in the region.

The household debt-to-gross domestic product (GDP) ratio was 88.4%, while corporate debt was about 110% of GDP in Malaysia. Any increase in the jobless rate could lead to a rise in household NPL, said Tan, citing the example of bank mergers which would result in retrenchments due to overlaps in certain segments.

“There’s this vulnerable household sector that is currently earning RM3,000 a month or less — those will be very sensitive to increases in interest rates,” he noted, adding that the group makes up some 12% of banking system loans currently.

“The good news is that there has been a very small decline in the household debt-to-GDP [ratio] in the last one year. Where I’m getting my comfort from is not the fact that it has come down, but the fact that there has been a change in trend, which is positive for the household sector as a whole,” Tan explained.

The household debt-to-GDP ratio contracted last year, the first time since 2010.

Meanwhile, S&P’s financial ratings associate Nancy Duan observed that Malaysian banks are becoming more cautious about lending to the commercial property market. “We have seen the loan approval rate for the segment drop by almost half,” Duan said during the conference call.

“We don’t think the stress has been translated into the overall NPL yet,” she added.

The slowdown in the O&G sector, she noted, may continue to see companies reducing corporate borrowings, while the pool of corporate deposits has fallen. “As a result, impaired loans and credit costs are expected to rise further,” Duan said.

For Malaysian banks, loan growth in 2017 is expected to be 5% to 6%, driven by demand for affordable housing, small and medium enterprises, and corporate loans for infrastructure projects, Duan said.

However, banks will suffer from higher credit costs that are expected to further stress the banks’ profit margin, she added.

“Malaysian banks in general [have focused on] protecting their bottom line, but we do have our doubts about how sustainable this approach can be in the future. The banks need to grow, and they have constant requirements to invest in compliance and technology.

“For example, the recent [RHB-AMMB Holdings Bhd] merger will lead to a spike in compensation costs. This all will [add] downside risks to earnings forecasts. We are not very optimistic about the [banks’] earnings performance,” Duan commented.

In an earlier report, the global rating agency said it expected full-year profitability for local banks to remain sluggish on a weak energy sector, subdued global demand and tightened domestic spending.