Banking sectors in Malaysia, and in the region, would likely to face a challenging 2016 as financial systems adjust to slowing growth in China and the prospects of higher US interest rates, according to Fitch Ratings’ 2016 Outlook Report.
As a result, Fitch Ratings has revised the outlook for Malaysian banks to negative in 2016, due to deteriorating asset quality and a more cautious risk appetite from most banks contributing to weaker credit growth, and margin pressures, all of which were likely to lead to slower profit growth.
In a statement, the rating agency said with persistently low commodity prices, weak external demand and low domestic sentiment, it believes there is a risk to the country’s gross domestic product (GDP) growth.
It is evident that some borrowers are facing difficulty in adjusting to the substantial slide in currency over the past 12 to 18 months, said Fitch.
“We believe these developments translate into lower loan growth and higher credit costs in the next one to two years,” it said in a report on 2016 Outlook: Asia-Pacific Banks released today.
Non-performing loan (NPL) formation is expected to continue to rise into 2016.
“The gross impaired-loan ratio – still steady at the long-term low of 1.6% at end-October 2015 – should increase, amid a more challenging environment.
“Delinquencies over the past 12-18 months have largely been from troubled industries offshore such as the commodity sector in Indonesia, but we expect deterioration in banks’ domestic portfolios to emerge in 2016,” it said.
Despite the tough sector outlook, Fitch’ rating outlooks remain mostly stable, as banks’ profitability and other loss-absortion buffers are expected to provide a sufficient cushion against the projected rise in impairment costs, broadly preserving their credit profiles, amid the anticipated downturn.
The ratings could face further downward pressure, Fitch warned, due to extended economic weakness, where significantly higher unemployment and a potential pull-back in lending would hurt banks’ asset quality, profitability and capitalisation.
“Exports and private domestic demand are the two largest drivers of the economy. Stronger global growth leading to more robust demand for Malaysia’s exports, or a convincing rebound in business and consumer sentiment – without excessive credit growth or inflation – would reduce the risks to GDP and banks’ asset quality,” it noted.
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