Malaysian banks stable for the next 12 - 18 months

Moody's Investors Service sees a stable outlook for the Malaysian banking system over the next 12-18 months as a supportive operating environment and comfortable capital levels outweigh concerns over high household leverage and increasing margin pressure from competition.

"The healthy state of the operating environment, as reflected in our assumption that GDP will grow at 5%-6% and unemployment will stay at around 3.3% in 2011-2013, underpins the sector's sustainability in earnings, based specifically on revenue growth and low provisioning costs," says Karolyn Seet, a Moody's Assistant Vice President.

"We also assume that Malaysia's inflation will be maintained at around the 3% level and that overall housing prices will continue to increase, but only gradually. Such stable price trends are beneficial to the banking sector's funding and asset quality," says Seet.

Seet was speaking on the release of Moody's annual update on the Malaysian banking system.
Moody's rates 9 commercial banks in Malaysia with their bank financial strength ratings ranging from C to D. The banks account for 82% of the system's assets.

"With an average Tier 1 capital ratio of 13.0% at end-2010, the system has sufficient capital to support asset growth in the next 12-18 months and an adequate buffer to absorb losses associated with our stressed scenarios. In the most stressed case of our scenario analysis, Moody's-rated banks would maintain a Tier 1 ratio above 8%," adds Seet. "In addition, Malaysian banks will not have difficulty meeting the new capital requirements stipulated under Basel III."

But there are concerns, including increasing household leverage and margin compression arising from intensifying competition.

Household leverage, as measured by household debt to GDP, rose to 76% at end-2010 from 69% at end-2006. Although this ratio did not increase in 2010, it is high compared with other Asian countries with similar income levels.

In addition, with 35% of household debt in the form of unsecured debt, the financial sector has more exposure to any rise in household delinquencies, due to higher losses given default, when compared to markets where a higher proportion of such debt is secured.

Another uncertainty is the state of global economy's recovery as Malaysia's economy is dependent on external factors, as indicated by a trade volume to GDP ratio of 170%.