KUALA LUMPUR (April 17): Fitch Solutions Country Risk and Industry Research has maintained its forecast for credit growth in Malaysia to slow slightly to 4.3% year-on-year (y-o-y) in 2023, from 4.5% in 2022, due to a weaker economic outlook and higher borrowing costs.

In a report last Friday (April 14), the firm said Malaysian banks on aggregate are likely to remain on a stable footing despite potential negative spillovers from banking stresses in the US and Europe due to robust liquidity and capital buffers, as well as a much less restrictive monetary environment.

It said asset quality had also remained fairly stable, despite the phasing out of support measures, and we are not expecting a significant deterioration in the months ahead.

“At Fitch Solutions, we believe that downside risks to Malaysia’s financial stability remain modest, and that banks remain well positioned to support financial intermediation, despite potential negative spillovers from banking stresses in the US and Europe.

“Importantly, banks have strong capital and liquidity buffers, while asset quality has remained fairly stable, despite the expiration of pandemic relief measures.

“The rate hiking cycle in Malaysia has also been much more gradual and modest than in other parts of the world, as inflation has been more subdued, and we expect interest rates to peak soon,” it said.

Overall, Fitch Solutions is forecasting credit growth in Malaysia to slow only slightly to 4.3% y-o-y in 2023, versus 4.5% in 2022.

The firm said the banking system’s strong liquidity coverage and loan-to-deposit ratios will continue to underpin financial stability in Malaysia.

It said the latest data showed that the liquidity coverage ratio rose to 152.7% in November 2022, from 147.1% in January, which is much higher than the minimum requirement of 100%, which also implied a higher margin of safety.

Meanwhile, it said the loan-to-deposit ratio had been relatively stable, staying within the range of 85-90% since 2014, with the latest figure coming in at 86.4%.

Fitch Solutions said Malaysian banks are also well capitalised with the aggregate banking system capital ratio coming in at 18.5% in February 2023, as compared with an average of 18.3% in 2022 .

“This was significantly higher than the regulatory minimum of 10.5% (an 8.0% total capital ratio and a 2.5% capital conservation buffer), resulting in an excess capital buffer of RM135.0 billion.

“Common Equity Tier 1 (CET1) and Tier 1 capital ratios also stood at 14.8% and 15.3% respectively in February, versus the Basel III requirements of 4.5% and 6.0%,” it said.