KUALA LUMPUR: The Malaysian banking system’s asset quality remained strong despite higher gross impaired loan ratio (GIL), according to RAM Ratings.
GIL increased to 1.6% as at end-July 2019 from 1.48% as at end-December 2018.
RAM co-head of financial institution ratings Wong Yin Ching said the weakness largely stemmed from a couple of lumpy impairments from the agriculture and manufacturing sectors.
“The rise in impaired loans is idiosyncratic in nature and we do not foresee industry-wide deterioration emerging in these two segments. The GIL ratio at the end of 2019 may slightly exceed our initial expectation of 1.6% but should stay below 1.7%. At this level, the domestic banking industry’s asset quality continues to compare favourably with regional peers,” Wong said in a statement in conjunction with the release of its Banking Quarterly Roundup – Q219.
The rating agency noted that the Q2 financial results also showed that the eight anchor banks’ average credit cost ratio remained modest at 27 basis points in 1H19, even after excluding a one-off MFRS 9-related adjustment by one institution.
“In addition, banks have maintained healthy loss absorption buffers with an average GIL coverage ratio of 131% (including regulatory reserves) and a common equity tier-1 capital ratio of 13.9%.”
Nonetheless, it said the profitability indicators of the majority of the eight anchor banks are still under pressure, with an average pre-tax return on assets of 1.33% and return on equity of 12.9% in 1H19 (1H18: 1.39% and 13.7%, respectively).
Meanwhile, domestic loan growth skidded to 3.9% year-on-year (yoy) while already-thinning net interest margins (NIMs) were crimped further subsequent to the May 2019 Overnight Policy Rate (OPR) cut.
However, RAM said lower net interest income was moderated by improved investment and trading income in 1H19.
It cautioned that NIMs may suffer another blow as the probability of an OPR cut later in the year is higher now, given that the worsening trade outlook could heighten downside risks to growth.
Loan applications only increased 0.8% yoy (three-month moving average) in July 2019. On a month-on-month basis, there was a 19.5% rebound in loan applications, primarily from households.
However, the rating agency said it remains to be seen whether the momentum can be sustained, particularly in view of the external uncertainties weighing on business and consumer sentiment.
“As such, our 5% loan growth projection for 2019 continues to carry some downside risk.”
