Moody's Maintains Stable Outlook on Malaysia's Banking System

Moody's Investors Service has announced that it maintains its stable outlook for the Malaysian banking system for the next 12 to 18 months in its most recent Banking System Outlook.


The stable outlook reflects Moody's expectation of a stable operating environment that will allow the banks to maintain their good asset quality, as well as strong capitalization levels and funding profiles.


At the same time, Moody's cautions over the looming risk posed by the twin trends of household leveraging and house price appreciation, which could, in less favorable conditions, undermine asset quality. But the rating agency says that this risk is unlikely to materialize within the timing horizon of its outlook.


Explaining Moody's view on the favorable operating conditions, Simon Chen, a Moody's Analyst and the report's author, indicates that he expects post-election continuity, including the maintenance of accommodative government policies that will support robust growth in GDP, which Moody's estimates will be 5% in 2013. He also sees bank loans growing by 10% during the same period.


"The key policies supporting this scenario feature government disbursements to implement infrastructure projects already in the pipeline, as well as accommodative monetary policies -- globally and domestically -- that will attract private sector investments, employment and consumption", says Chen.


Moody's report also says that because impaired assets are at record low levels, any further improvement in this area is unlikely.


"While pockets of the consumer sector may be taking on too much leverage, the associated credit risks should be contained for as long as interest rates remain low," says Chen.


As the report notes, any upward movement in current low official interest rates would have a negative effect on various asset classes, such as export-oriented manufacturers, high loan-to-valuation mortgages, and highly-leveraged households. Moody's estimates that these asset classes account for less than 20% of all loans in the banking system.


Yet, Moody's stress testing analysis indicates that the loss-absorbing buffers of Moody's-rated banks would allow them to sustain a considerable deterioration in asset quality, while maintaining core equity tier 1 ratio above regulatory minimum.


Furthermore, capitalisation levels are highly unlikely to fall below current levels, as the banks manage their balance sheet growth against the higher capital requirements specified under Basel III, which will lock in existing buffers.


On liquidity, the report says Moody's expects the banking system to maintain robust levels, given that the banks have managed well their funding profiles, characterised by: 1) a stable average overall loan-to-deposit ratio of 79%, and 2) the availability of longer-term funding that the banks may obtain from the debt capital markets.


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