Moody's maintains stable outlook on 13 APAC banking systems including Malaysia

Moody’s Investors Service has maintained a stable outlook on 13 Asia-Pacific (APAC) banking systems, including Malaysia.

In a statement on 1st March, the credit rating agency said Malaysia’s banking system outlook remained stable, underpinned by strong economic growth and robust credit metrics across the system.

“While weakening exports will weigh on Malaysia’s economic growth, strong domestic demand will support it as the country’s labour conditions improve and inflation will remain lower than regional peers.

“Banks’ ample loan-loss buffers and the ongoing forbearance measures will mitigate asset risks from weak borrowers,” it said.

Moody’s said stable net interest margins and loan-loss provisions would help keep banks’ pre-tax profitability broadly steady while the absence of a one-off prosperity tax would boost their bottom-line profitability in 2023.

It said banks’ capitalisation and liquidity would remain strong as credit growth slowed moderately given the expectation of further policy rate hikes this year.

“We expect Malaysia’s real gross domestic product growth to moderate to 4.5% in 2023 from 8.7% in 2022 due to the weakening of export demand, partly mitigated by strong domestic demand amid improving labour conditions.

“We expect systemwide credit growth to decline modestly to about 5% in 2023 from 5.5% in 2022 as high-interest rates will dampen credit demand.

“In addition, we expect further policy rate hikes in 2023 as inflation remains elevated compared to pre-pandemic levels,” it said.

Moody’s said the bank’s asset quality would be stable as rate hikes last year have increased the debt burdens of borrowers with low-income individuals being particularly vulnerable.

Additionally, it said a supply glut in the property market would continue to weigh on the repayment capacity of developers and construction companies.

“The asset quality of loans to the real estate and construction sectors has deteriorated over the past two years, but banks’ repayment assistance programmes will help limit asset risks and strong loan-loss reserves will provide buffers against future loan losses.

“The asset-weighted average loan-loss reserves as a percentage of gross impaired loans for Moody’s rated banks decreased to 156% at the end of September 2022 from 163% at the end of 2021 but they still are above pre-pandemic levels,” it said.

Moody’s said it also foresaw that Malaysian banks would maintain strong funding and liquidity facilitated by moderate loan growth, allowing banks to reduce their use of market funds.

“Although current account and savings account (CASA) deposits will decrease as depositors shift to higher-yielding term deposits, we expect CASA deposits to remain above pre-pandemic levels.

“The systemwide liquidity coverage ratio remained strong at 147% at the end of November 2022, although it declined from 153% at the end of 2021," it said.

Meanwhile, the credit rating agency said a total of 13 APAC banking system outlooks are currently stable compared to 15 at the same time last year.

Moody’s said it has revised the banking system outlook for Bangladesh and Pakistan to negative from stable and Vietnam’s banking system outlook to stable from positive.

The credit rating agency has also maintained a negative outlook on China’s banking system.

“Despite the uneven macroeconomic and operating conditions in many APAC economies amid higher inflation and weaknesses in exports, the stable outlook on most banking systems is supported by the banks’ relatively strong solvency and liquidity,” it said.