PETALING JAYA: Non-performing loan (NPL) growth for banks in Malaysia could be higher than their loan growth this year as the industry deals with the economic fallout from the coronavirus (Covid-19) outbreak.
S&P Global Ratings projects the NPL ratio could peak to between 1.7% and 1.8% of outstanding loans this year compared with 1.5% as of Dec 31,2019.
The ratings house also revised down its credit growth forecast for Malaysian banks, from the previous 3%-5% to 1%-3% in 2020.
S&P Global Ratings 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.”
In particular, the global health emergency and domestic political upheaval are affecting oil prices, consumer confidence and the broader economy in Malaysia.
S&P Global Ratings’ forecasts are based on the assumption that the Covid-19 outbreak will subside and the domestic political stability can be restored over the coming months.
Should these risks prolong beyond the second quarter of 2020, the forecast figures would need to be revisited.
A banking analyst disagrees with the assumptions of the foreign credit agency and expects loan growth in 2020 to be about 4%, in line with gross domestic product (GDP) growth.
“Looking at the 1.6% NPL ratio recorded in January 2020, there could be a slight uptick going forward.
“This will depend on the depth of external factors apart from Covid-19, such as the US-China trade tensions, which is still ongoing, ” he said.
When asked if the overnight policy rate (OPR) cuts can help boost loan demand, the analyst opined that this would be dependent on market sentiments, as further rate cuts may not translate to improved consumer purchasing power.
Kenanga Research, in a sector report, said accommodative interest rates will continue to support a resilient household loan segment, alleviating the moderation in business loans.
Given the banks’ modest target for 2020 after the recent results season, the research house forecasts loan growth at 4% to 4.5% for the year, driven by resilient household and business loans, with a fiscal push expected in the second half of the year.
“The soft interest rate regime is expected to support loan growth coupled with ease of application.
“While the uptick in impaired loans is a concern, it is still below its five-year peak of 1.67% in February 2015, ” said Kenanga Research.
Meanwhile, S&P Global Ratings also expects more potential easing from Bank Negara to support the economy, leading to a further five to 10 basis point compression of banks’ net interest margin 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, ” it said.
On the government’s RM20bil stimulus package, S&P Global Ratings expects it to have a neutral impact on local banks.
“Supportive policies in the package could strengthen lifelines to banks’ affected clients.
“However, we feel the special credit facility of RM2bil is more symbolic than material, and that credit demand will weaken visibly, especially over the first half of 2020.
“Transitory asset-quality problems could become permanent if the severity and duration of the disruptions were prolonged.
“This in turn would eventually push up banks’ credit costs – meaning the allocation of provisions for impaired and potentially impaired loans, ” the credit risk research house noted, projecting sector-wide credit costs to be 20 to 25 basis points of total loans in 2020.
It is interesting to note that Malaysian banks’ direct exposure to the most disrupted sectors by Covid-19, such as hotels, restaurants and airlines, is small, at only a single-digit percentage of loan books on average.
Duan added that Malaysian banks are fundamentally strong, backed by low NPL ratios, light credit costs, and large capital buffers.
“The banks’ credit profiles have remained solid despite muted profitability in recent years. Conditions in 2020 will put the banks to a much bigger test to their resilience, ” she said.