Malaysian Banking System Outlook Remains Stable, Says Moody’s

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SINGAPORE, May 28 – Moody’s Investors Service says the outlook on the Malaysian banking system remains stable. This reflects Moody’s expectation of a stable operating environment that will allow banks to maintain resilient asset quality, as well as strong capitalisation levels and funding profiles. The rating agency expects the measures taken by the Malaysian government to implement fiscal reform and consolidation to moderate somewhat the pace of economic growth over the outlook horizon. It also expects that inflation will accelerate mildly, as subsidies on fuel, electricity and sugar are phased out.

Moody’s said its central forecast for real gross domestic product (GDP) growth in 2014 is five per cent, as domestic consumption and investment remains steady and exports rise in line with the ongoing recovery of the advanced economies. “In this context, the relatively high rate of economic growth will support the banks’ asset quality as well as credit growth, which we expect to be slightly lower than the 11 per cent recorded in 2013,” Moody’s said. Moody’s conclusions were contained in its just-released “Banking System Outlook Malaysia” report.

Moody’s had originally assigned the stable outlook on May 15, 2013. It expects interest rates to increase only modestly and gradually over the horizon of its outlook. The report further noted that Islamic banking is the main focus area for domestic business growth of Malaysian banks. All the banks have Islamic banking subsidiaries, whose assets have been outgrowing the conventional banking assets of their parents. As of March 2014, Islamic bank financings comprised 24 per cent of total banking-system loans, and the country has a goal of expanding the proportion of Islamic financing of total domestic financing to 40 per cent by 2020.

Moody’s rates a total of 11 banks in Malaysia. Eight are conventional commercial banks, one is an investment bank, another an Islamic bank, and the last, a government-owned development financial institution. The rated banks accounted for 73 per cent of Malaysian banking-system assets as of end-2013. The average (asset-weighted) standalone credit assessment of the conventional banks in Malaysia is baa1. The average long-term foreign-currency deposit rating of the Malaysian conventional banks is A3, as Malaysia’s A3 foreign-currency rating in effect caps the bank ratings.

The senior unsecured debt and deposit ratings of the banks receive one notch of uplift on average, because of Moody’s assumption of strong government support. The outlook on the foreign currency ratings of eight banks is positive, driven by the positive outlook on the A3 rating of the government. The average (asset-weighted) local-currency deposit rating is A1, two notches higher than the foreign-currency rating. Local-currency ratings are capped by the higher local-currency ceiling for Malaysia (A1).

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