S&P Global revises outlook on five Malaysian banks to negative

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KUALA LUMPUR (June 30): S&P Global Ratings has revised its outlook on five Malaysian banks — Malayan Banking Bhd (Maybank), CIMB Bank Bhd, Public Bank Bhd, RHB Bank Bhd and AmBank (M) Bhd — to negative from stable.

In a statement, S&P said the rating actions on these banks are based on the outlook revision on the sovereign credit ratings on Malaysia, as the rating agency said it expects these banks to continue to benefit from external support from the sovereign over the next 12 to 24 months.

It affirmed its 'A-' long-term and 'A-2' short-term issuer credit ratings on Maybank, CIMB Bank, and Public Bank, and its 'BBB+' long-term and 'A-2' short-term issuer credit ratings on RHB Bank and AmBank.

However, it said, ratings on these banks could fall by a notch in case of a downgrade of the sovereign in the next 18 to 24 months.

“The ratings on Maybank, CIMB Bank, and Public Bank will continue to be capped by our sovereign credit ratings as we do not expect the banks to be able to withstand the stress associated with a sovereign default.

“Our ratings on these banks will therefore move in tandem with that on the sovereign,” it said.

Meanwhile, S&P’s ratings on RHB Bank and AmBank could be lowered in case of a sovereign downgrade or a deterioration in stand-alone credit profile (SACP).

It said its ratings on these two banks currently incorporate one notch uplift of government support from their ‘bbb’ SACP, reflecting a moderately high likelihood of government support.

“We could revise the outlook on all the banks back to stable following a similar revision in the outlook on the sovereign rating,” it said.

On Friday (June 26), S&P Global revised its outlook to negative on the foreign currency and local currency long-term sovereign credit ratings on Malaysia due to additional downside risks to the government’s fiscal metrics, given the weak global economic climate and heightened policy uncertainty.

S&P Global noted that it expects the banking sector’s non-performing loan (NPL) ratio and credit costs to increase to 2.8% of total loans and 66 basis points (bps) of gross loans by the end of 2020.

“The sector NPL ratio and credit costs are likely to stay at relatively high levels of 3.9% and 62bps in 2021 as we expect unemployment conditions to remain challenging in 2021. The blanket moratorium on loan repayments by all retail and small- and mid-size enterprise clients could result in lower actual NPLs and credit losses this year compared with our forecasts.

“However, we expect banks to start proactively increasing provisioning given the significantly weakening economic prospects and business outlook,” said S&P.

S&P believes Malaysian banks' solid capital buffers (14% common equity Tier-1 ratio) are important mitigants that could partially offset unexpected credit losses from the transitory but acute Covid-19 shock to the economy.

“However, a likely deep compression in net interest margins (NIM) could mean additional downside risks to that buffer. We forecast a 10bps compression of net interest margin in this year alone,” it noted.

Besides, it expects the unemployment rate to come under moderate pressure over the next two years by 4.9% in 2020 before declining modesty to 4.7% in 2021.

“Any significant deterioration in unemployment conditions could materially weaken the creditworthiness of Malaysian banks,” said S&P.