KUALA LUMPUR (Oct 17): S&P Global Ratings has classified Malaysia’s banking sector as “Group 4” under its Banking Industry Country Risk Assessment.

In a statement, the rating agency said that other Group 4 countries were New Zealand, Taiwan, Kuwait, Saudi Arabia, Iceland, Ireland, Poland, Slovenia, Spain and Mexico.

“The anchor, the starting point in assigning an issuer credit rating, for banks operating only in Malaysia is 'bbb',” S&P said.

“Competitive pressure is likely to remain in the home market, as reflected in decreasing margins and earning metrics. Banks have relied on a combination of cost control and increase in non-interest income to offset pressure on the lending business. We consider Malaysia's regulatory standards to be broadly in line with international norms, and the industry's risk appetite to be moderate,” S&P said, noting Malaysia’s banking system was supported by high levels of stable core customer deposits.

Malaysia’s credit risk is elevated as the country has a high degree of private sector indebtedness relative to income, the rating agency said, but noted the relative strength of household and corporate income, stable employment conditions and healthy debt servicing ratios mitigate this risk.

In addition, it pointed out Malaysian banks’ asset quality could modestly deteriorate on account of slower economic growth amid an environment of domestic policy uncertainty and escalating external headwinds. However, S&P said this impact would be manageable, given that “non-performing loans are well provided for and increasing from a low base”.

Overall, the rating agency expects the Malaysian banking industry’s risk level to remain stable, and anticipates domestic banks to maintain a healthy level of local currency deposits — reflecting their dominant retail presence, strong consumer confidence and a high savings rate of 30% of Gross Domestic Product (GDP).

“Malaysia's deep bond market in comparison to most Asian peers' further reduces banks' reliance on external funding,” it said.

In terms of its economic risk assessment, S&P said its view on the Malaysian economy reflected its [Malaysia’s] diversified economy, combined with a flexible labour market, reasonably developed infrastructure and high savings rate. However, the country’s modest income levels and vulnerability stemming from its export-oriented economy to global economic conditions could mitigate such advantages, S&P said.

The rating agency forecast Malaysia’s economy to remain stable as it sees little transitional risk under the PH Government in terms of prudential regulation of the domestic banking sector.

It added that the cautious stance adopted by the previous BN Government against potential imbalances in residential property sector, and the emphasis on prudent and responsible lending have been maintained under the new government.

In addition, the various prudential and cooling measures taken by Malaysian regulators have slowed property price and household debt growth.