Malaysian banks prepared for tougher conditions: S&P

KUALA LUMPUR, April 11 (Xinhua) -- S&P Global Ratings said Tuesday that Malaysian banks can ride out tougher conditions this year amid a slowdown in the country's growth rate and weaker borrowing appetite.

The rating agency said in a statement that higher funding costs will drag on credit demand in Malaysia, and the credit growth could slow to 4 percent to 5 percent from 6 percent in 2022.

According to the rating agency, Malaysia's economy is projected to expand by 3.2 percent in 2023, which is a large comedown from the strong post-pandemic recovery of 8.7 percent in 2022.

The global economic slowdown and higher interest rates are key drivers of a slower economy, it said.

It also said Malaysian banks' net interest margins are likely to decline by 5 to 10 basis points as term deposit rates continue to increase in step with policy rates.

It said that sector-wide return on assets could stay flattish at 1.4 percent in 2023, as the expected decline in net interest margins would be balanced by a normalization in tax rates.

It also noted that worsening conditions is a negative for asset quality for Malaysian banks.

However, S&P reckoned that a moderate deterioration should be manageable as corporate and household balance sheets in Malaysia remain robust.

Furthermore, it said stable employment conditions and adequate household financial assets in the country are mitigating factors against high household debt.

While low-income households and small and midsized enterprises (SMEs) are particularly vulnerable to rising costs, it said banks' adequate provisioning buffers should help them absorb accelerating credit risks.

It also said significant household deposits add stability to Malaysian banks' funding profile.

Investment portfolios form about 20 percent of total assets in Malaysian banks, with half of the exposure in safe government securities.

Healthy capitalization, and stable retail deposit bases, are key credit strengths for Malaysian banks, said S&P.