PETALING JAYA – The six largest Malaysian banks in terms of total assets that are rated by Moody’s Investors Service show continued asset quality deterioration from their overseas loan portfolios, weaker profitability from slower revenue growth, as well as higher credit costs.
Moody’s-rated Malaysian banking groups include Malayan Banking (Maybank) (A3/A3 stable, a3); CIMB Group Holdings (Baa1 stable); Public Bank (A3/A3 stable, a3); RHB Bank (A3/A3 stable, baa3); Hong Leong Bank (A3/A3 stable, baa1); and AmBank (M) (Baa1 stable, baa3).
Nevertheless, the international rating agency said the banks’ capital and liquidity profiles remained stable last year, providing buffers against continued weak operating conditions.
“Gross impaired loan ratios either improved marginally in 2016 or remained flat year-on-year for domestic-focused banks like AmBank, Hong Leong Bank and Public Bank,” Moody’s vice-president and senior analyst Simon Chen said.
“However, banks with sizeable operations in other parts of Southeast Asia, such as Maybank, CIMB Group and RHB Bank, recorded higher gross impaired loan ratios in 2016 from a year ago,” he added.
According to a recent Moody’s report, Malaysian banks with sizeable operations outside of the country are driven primarily by weaknesses in their key overseas loan portfolios, including borrowers from the oil and gas service sector in Singapore, and borrowers affected by weak operating conditions in Indonesia, Thailand and other countries.
Moody’s noted that oil and gas loans made up less than 4% of the banks’ total loan portfolios at end-2016.
However, the rating agency said, the asset quality of the banks’ operations in Malaysia remained robust last year.
“While a few banks experienced marginal rises in loan impairments from borrowers in the commodities sector, signs of broad asset quality deterioration across the corporate and household sector were absent,” it said.
As for profitability, Moody’s said the profitability of these six rated Malaysian banks was mixed in 2016, of which Hong Leong Bank and CIMB Group showed improved profitability, while the other four banks recorded declines in their returns on average assets, primarily driven by higher credit provisions.
Moody’s said it expects this trend to persist this year, in line with a further weakening in the banks’ asset quality.
However, it said net interest margins (NIMs) improved last year, despite the lowering of the country’s benchmark interest rate by 25 basis points to 3% in July 2016.
Moody’s said the improved margins were mainly due to more aggressive funding strategies, as the banks increased their loan-to-deposit ratios, as well as lending to the higher-yielding small and medium enterprise segment.
It added it expects limited upside in NIMs for 2017 as loan-to-deposit ratios moderate and banks continue to face keen competition for customer deposits.
For 2017, Moody’s said capital buffers should increase further, because increases in risk-weighted assets will be muted.