Recovery of Malaysian banks is further away: S&P

June 30, 2021

SINGAPORE -- S&P Global Ratings said today that Malaysian banks will continue to be an Asian outlier in their recovery path. "The path to normalisation is likely to be protracted due to the flare-up of new COVID-19 waves and inevitable disruptions in near-term economic prospects," it said. "The six-month blanket moratorium revealed by the Malaysian government on June 28 should further delay the timeline for banks' return to normal."

S&P Global Ratings credit analyst, Nancy Duan, said: "The length of the current national lockdown in Malaysia and effective containment of the pandemic are key variables in charting the course of the banking sector's asset quality trend."  

The new moratorium would freeze formation of new non-performing loans (NPLs) until early 2022, further distorting the already underreported impaired loan ratio for the industry, she said.

"The industry ratio of NPLs has been flattish at 1.5%-1.6% since December 2019, even as the economy contracted 5.6% in 2020 amid COVID-19."

The six-month debt payment holiday for all individual, micro-enterprises-, and eligible small and mid-sized borrowers, starting from July 7, 2021, meant few slippages are likely to be reported for the second half of 2021, she said.

"We don't foresee a substantial jump in the moratorium take-up rate from the current 15%. That's because of the additional interest burden that will be accrued for moratorium borrowers and still healthy balance sheets for most household and corporate borrowers in Malaysia."

Duan said: "Our base case suggests most weak credits are already covered by the ongoing targetted assistance programmes.

"Further, additional participation from uncovered borrowers should be incremental, barring a lengthy lockdown and material deterioration in employment conditions.

"In comparison, the moratorium take-up rate peaked at 75%-80% of the industry loan book during the first six-month blanket moratorium in 2020.

"Our estimates on credit costs--a measure of loan-loss provisions--show Malaysian banks will lag recovery timelines of many other regional banks.

We now forecast Malaysian banks will bear still-elevated, cumulative credit costs of 110-120 basis points (to gross loans) for 2021 and 2022 combined. The industrywide NPL ratio should rise to 3.0%-4.0% by end-2022, in our view." (ATI).