Due to greater pressure on earnings and asset quality, Fitch Ratings has revised the 2016 outlook for Malaysian banks to negative. It highlighted that risks to the country’s gross domestic product (GDP) growth include persistently low commodity prices, weak external demand and lacklustre domestic sentiment.
Apart from that, the rating agency also expects some debtors to face difficulty in adjusting to the significant currency depreciation over the past 12-18 months.
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Fitch believes that these developments will translate into lower loan growth and higher credit costs in the next one to two years. It also anticipates the recent rise in non-performing loan (NPL) formation to continue into 2016.
However, the rating agency expects that Malaysian banks’ profitability and loss-absorption buffers will provide a sufficient cushion the projected rise in impairment costs – broadly preserving their credit profiles amid the anticipated downturn. It also believes that compression in net earnings should be offset by a significant reduction in operating costs.
The rating agency expects deposit competition to remain intense with slower market conditions limiting non-interest income growth. Operating expenses in 2016 should also be contained, helped by staff-reduction plans announced over 2015.
These buffers – along with banks’ and Bank Negara’s liquidity management toolkits – should help preserve orderly funding and credit conditions in 2016, barring a severe credit or liquidity shock, it believes.
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