KUALA LUMPUR (March 5): S&P Global Ratings expects slower credit growth and a higher non-performing loan (NPL) ratio for Malaysian banks amid challenging operating conditions.

In a statement today, the rating agency said banks are facing a multitude of headwinds from a position of strength, supported by their solid performance in 2019.

S&P credit analyst Nancy Duan said the global outbreak of Covid-19 and renewed domestic political uncertainty add obstacles for Malaysian banks, which are already grappling with the effects of a slowing economy and dampened investor and consumer sentiments over the past year.

“We are revising down our credit growth forecast for these banks to 1%-3% in 2020, from the previous 3%-5%.

“We now expect NPLs to reach 1.7%-1.8% of outstanding loans this year, versus 1.5% as of Dec 31, 2019,” she said.

Duan said the forecasts were based on the assumption that the global Covid-19 outbreak will subside and the domestic political stability can be restored over the coming months.

“We will need to revisit our numbers if those risks stretch beyond the second quarter of 2020.

“In our view, the government's recently announced credit relief measures could buy some time for the sectors most disrupted by the coronavirus outbreak,” she said.

Duan said S&P also expects more potential easing from Bank Negara Malaysia to shore up the economy, leading to a further 5-10 basis point compression of banks' net interest margin (NIM) in 2020.

“Our base case assumes stable capital adequacy ratios. However, risks are now tilted to the downside, given added drains on profitability and the rising dividend payouts announced by some banks last week,” she said.

Meanwhile, she said the rating agency expects a generally neutral impact to domestic banks from the RM20 billion stimulus package unveiled last week.

Duan said even before the government's stimulus package, the country's banks had rolled out their own programs to provide relief to struggling corporate borrowers.

“Supportive policies in the package could strengthen lifelines to banks' affected clients.

“However, we feel the special credit facility of RM2 billion is more symbolic than material, and that credit demand will weaken visibly, especially over the first half of 2020,” she said.

Duan said Malaysian banks' direct exposure to the most disrupted sectors, such as hotels, restaurants and airlines, is small at only a single-digit percentage of loan books on average.

“However, the global health emergency and domestic political upheaval are hitting oil prices, consumer confidence, and the broader economy in Malaysia. We will closely monitor such second-order effects and revise our forecasts as necessary.

“Malaysian banks are fundamentally strong, as reflected by their low NPL ratios, light credit costs, and large capital buffers.

"The banks' credit profiles have remained solid despite muted profitability in recent years. In our opinion, conditions in 2020 will put the banks to a much bigger test to their resilience,” she said.