Malaysia Banking Sector Update Asset Quality Recovery Delayed Beyond 2021 - Nancy Duan Ivan Tan Geeta Chugh - S&P Global
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Malaysia Banking Sector Update Nancy Duan
Ivan Tan
Asset Quality Recovery Delayed Beyond 2021 Geeta Chugh
April 12, 2021Key Takeaways – Higher stress on asset quality could come from wholesale and retail trading, construction, transport, and household sectors when the debt moratorium on retail and SME segments is being phased out. – We have revised down our sector credit growth to 6.0% from 8.0% previously as a result of lower GDP growth projection. Growth will be driven by secured consumer lending and pent-up business loan demand. – Strong capital and funding positions anchor Malaysian banks’ stand-alone credit profiles but their negative rating outlook highlights the weakened credit standing of the Malaysia sovereign amid the pandemic’s hit to the economy.
2021 Recovery May Be Weaker On COVID Travel Restrictions
Our recent revisions of GDP growth and unemployment rate forecast for Malaysia
10% 6.0%
– S&P recently revised down its 2021 GDP
8% 5.5% forecast for Malaysia to 6.2% from 7.5%
previously.
6%
5.0%
4%
4.5% – Meanwhile, unemployment rate is also
2%
4.0% expected to stay higher for longer.
0%
3.5%
-2%
– The downward revisions are prompted by the
3.0% renewed economic weakness in 1Q 2021.
-4%
-6% 2.5%
-8% 2.0%
2019 2020 2021f 2022f 2023f 2024f
Real GDP Growth@Mar2021 (left scale) Real GDP Growth@Nov2020 (left scale)
Unemployment Rate@Mar2021 (right scale) Unemployment Rate@Nov2020 right scale)
f--Forecast. Source: S&P Global Ratings.
3Still Far From Business-As-Usual For Malaysia’s Economy
– Resurgence of COVID-19 infections and the reintroduction of domestic travel restrictions delay recovery.
– Normalization of business activities is only expected after vaccine rollout to achieve herd immunity.
Google Mobility Data Suggests Residents’ Activities Remain Strained COVID Cases Better Contained By Recent Movement Controls
Retail and recreation Transit Workplace Residential Reported daily new COVID-19 cases in Malaysia
60 7000
40 6000
20
5000
0
4000
-20
3000
-40
2000
-60
-80 1000
-100 0
Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21
Source: Google, S&P Global Ratings. Source: Our World in Data, S&P Global Ratings.
4Delayed Crystallization Of Stressed Asset Led To Provisioning Jump
– Significant decline of moratorium credits after 3Q 2020 reveals credit transition.
– Credit cost will remain elevated in 2021 after reaching a decade high last year.
Steep Decline Of Moratorium Coverage Since Last Sept. Only Moderate Rise Of NPL Ratio But Substantial Growth In Provision
Jun-20 Dec-20 Feb-21 Credit cost (right scale) Industry NPL ratio (left scale) Bps
80% 3.0% 90
70% 80
2.5%
60% 70
2.0% 60
50%
50
40% 1.5%
40
30%
1.0% 30
20% 20
0.5%
10% 10
0% 0.0% 0
Moratorium coverage (%) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: S&P Global Ratings estimates. NPL--Nonperforming loan. Bps-- Basis points. Source: S&P Global Ratings, bank reports.
52020 Year-End Industry NPL Ratios Distorted By Moratorium
– We expect NPL ratios in wholesale and retail trade and construction to deteriorate more visibly.
– Credit trends of banks’ retail portfolio will diverge as crisis tests the resilience.
Sector-Wise NPL Ratio Trending Up For Agriculture And Consumer Credits Could Face Higher Pressure As Stage 2 Ratio
Transportation Rises To 7.3% By End-2020
Dec-19 Dec-20 Dec-19 Dec-20
Agriculture Purchase of securities
Mining Purchase of transport vehicles
Manufacturing ow, purchase of passenger cars
Utilities Purchase of residential properties
Wholesale and retail trade Purchase of non-residential properties
Construction Purchase of fixed assets other than…
Transport, storage and communication Personal loans
Financial services Credit card
Education and health Construction
Household Working capital
Other sectors Other purposes
Total Total
0.0% 2.0% 4.0% 6.0% 0.0% 2.0% 4.0% 6.0% 8.0%
NPL--Nonperforming loan. Source: Bank Negara Malaysia, S&P Global Ratings. Source: Bank Negara Malaysia, S&P Global Ratings.
6Banks’ NPL Ratios Started Trending Up Since 4Q 2020
Banks’ 4Q NPL Ratios Could Increase More Visibly Excluding Write-offs And NPL Sale
4Q2019 1Q2020 2Q2020 3Q2020 4Q2020 4Q2020a – 4Q 2020 NPL ratios of major banks
4.5% weakened more after adjustments.
4.0%
3.5% – Recovery prospects of major Malaysian
banks’ regional markets vary.
3.0%
2.5%
– Small banks are more vulnerable compared
2.0% with bigger lenders on thinner buffer.
1.5%
1.0%
0.5%
0.0%
Maybank CIMBG Public RHB Hong AMMB Affin Bank Alliance Industry
Bank Leong Bank
Bank
NPL--Nonperforming loan. a--Actual. Source: S&P Global Ratings, banks’ reports.
7Substantial Build-up Of Stage 1 And 2 Allowances Throughout 2020
– Local banks could maintain their high stage 1 and 2 allowance coverage in most of 2021.
– We also expect banks to look at NPL sales more actively.
Trends Of Local Banks' Stage 3 Coverage Fluctuate On Write-offs, NPL Malaysian Banks Significantly Strengthened Their Stage 1 And 2
Sales And ECL Model Assumption Changes Allowances In 4Q 2020 After The Expiry Of Blanket Moratorium
1Q2019 2Q2019 3Q2019 1Q2019 2Q2019 3Q2019
4Q2019 1Q2020 2Q2020 4Q2019 1Q2020 2Q2020
3Q2020 4Q2020 Industry level as of Dec-2020 3Q2020 4Q2020 Industry level as of Dec-2020
70% 1.8%
60% 1.6%
1.4%
50% 1.2%
40% 1.0%
30% 0.8%
0.6%
20%
0.4%
10% 0.2%
0% 0.0%
NPL--Nonperforming loan. ECL--Expected credit loss. Source: S&P Global Ratings, banks’ reports. Source: S&P Global Ratings, banks’ reports.
8Asset Quality Recovery To Be Delayed Beyond 2021
We Expect COVID-19’s Hits On Asset Quality To Materialize This Year
Dec-2019 Dec-2020 Dec-2021f Dec-2022f – Our base case assumes the industry
maintains its end-2020 allowance coverage.
Gross loan growth (%) 3.9% 3.4% 6% 5%
Gross NPL ratio (%) 1.5% 1.56% 2.5-3.0% 3.0-3.5%
– We expect more stresses from agriculture,
Credit cost (bps) 8 79 60-70 40-50 domestic trade, construction, transport, and
consumer lending.
f--Forecast. NPL--Nonperforming loan. Source: S&P Global Ratings.
Industry Credit Cost Peer Comparison – Malaysian banks, however, face this
2019 2020 2021f 2022f downturn from a position of strength.
4.00%
3.00%
2.00%
1.00%
0.00%
Malaysia Singapore Philippines Vietnam Thailand China Indonesia India
f--Forecast. Source: S&P Global Ratings.
9Net Interest Margin And Profitability Only Recover Slowly This Year
– Less near-term upside for net interest margin (NIM) as Bank Negara Malaysia is likely to keep policy rate low.
– Bottomline performance could stay muted in 2021 on the elevated credit cost.
Industry NIM To Stabilize In The Next 12-24 Months Sector ROA And ROE Are Likely To Stay Depressed In 2021
NIM (left scale) Policy rate (right scale) ROE (right scale) ROA (left scale)
2.3% 4.0% 1.8% 20%
1.6% 18%
2.2% 3.5% 1.4% 16%
14%
1.2%
2.1% 3.0% 12%
1.0%
10%
0.8%
2.0% 2.5% 8%
0.6%
6%
1.9% 2.0% 0.4% 4%
0.2% 2%
1.8% 1.5% 0.0% 0%
f--Forecast. NIM-- Net interest margin. Source: S&P Global Ratings. ROE--Return on equity. ROA--Return on assets. Source: S&P Global Ratings.
10Strong Capitalization And Funding Support Creditworthiness
– Strong capital position and funding/liquidity conditions are critical buffers to the downside.
– We expect loan growth to slightly outperform deposit growth over the next two years.
Rated Malaysian Banks’ Capital Position Progressively Enhanced Liquidity Conditions Remain Supportive In the Near Term
Weighted average S&P RAC ratio of rated banks* Liquidity coverage ratio Loan-to-deposit ratio
10.5% 90%
10.0%
88%
9.5%
86%
9.0%
84%
8.5%
8.0% 82%
7.5% 80%
2015 2016 2017 2018 2019 2020 2021f 2022f
7.0%
2016 2017 2018 2019 2020 2021f 2022f 125% 124% 135% 143% 149% 148%
Source: S&P Global Ratings. *S&P rated Malaysian banks include Maybank, CIMB, RHB Bank, Public Source: S&P Global Ratings.
Bank, and AmBank (M) Bhd.
11Bank Ratings Carry Negative Outlook On Sovereign
– We believe the stand-alone credit profiles of rated Malaysian banks remain sound.
– Downside risks to bank ratings stem from the sovereign outlook at this point.
Bank SACP Ratings/Outlook Comments
Maybank a- A-/Negative/A-2 Negative outlook on sovereign rating cap
CIMB Bank a- A-/Negative/A-2 Negative outlook on sovereign rating cap
Public Bank a A-/Negative/A-2 Negative outlook on sovereign rating cap
RHB Bank bbb BBB+/Negative/A-2 Negative outlook on likely reduced sovereign capacity to support
AmBank bbb BBB+/Negative/A-2 Negative outlook on likely reduced sovereign capacity to support
Source: S&P Global Ratings.
12Rating Scores For Individual Banks
Maybank CIMB Bank Public Bank RHB Bank AmBank (M) Bhd.
Anchor bbb bbb bbb bbb bbb
Business position Strong (+1) Strong (+1) Strong (+1) Adequate (+0) Adequate (+0)
Capital and earnings Adequate (+0) Adequate (+0) Adequate (+0) Adequate (+0) Adequate (+0)
Risk position Adequate (+0) Adequate (+0) Strong (+1) Adequate (+0) Adequate (+0)
Above average and strong Above average and strong Above average and strong Average and adequate Average and adequate
Funding and liquidity
(+1) (+1) (+1) (+0) (+0)
SACP a- a- a bbb bbb
Systemic importance High High High Moderate Moderate
Sovereign support +0 +0 +0 +1 +1
ICR A-/Negative/A-2 A-/Negative/A-2 A-/Negative/A-2 BBB+/Negative/A-2 BBB+/Negative/A-2
Source: S&P Global Ratings.
13Analytical Contacts
Nancy Duan Ivan Tan Geeta Chugh
Associate Director Director Senior Director
nancy.duan@spglobal.com ivan.tan@spglobal.com geeta.chugh@spglobal.com
+65-6236-1152 +65-6239-6335 +91-2233-4219 10
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