KUCHING: Based on Bank Negara Malaysia’s (BNM) financial stability review, Malaysia’s financial institutions have been viewed as resilient enough against repercussions of the Coronavirus Disease 2019 (Covid-19) outbreak.
However, analysts warned that there will be more headwinds ahead for banks now given the current recessionary environment in 2020.
In a report, the research team at Affin Hwang Investment Bank Bhd (AffinHwang Capital) commented: “Though the Malaysian banking sector continues to be backed by resilient and strong fundamentals, the sector is facing more headwinds now given a recessionary environment in 2020, with the risk of contraction in credit growth and deteriorating asset quality (as default rates may rise after the six-month moratorium period expires).
“In addition, a few key banks’ exposure to the oil & gas (O&G) sector may pose downside risks as the oil price stays low.”
Of note, BNM acknowledges that the Malaysian banking sector continues to display strength, supported by strong capital buffers and sufficient liquidity, while household risk to the financial system is mitigated by sustained debt-servicing capacity and lower exposure of the banking system to vulnerable households (with wages more than RM3,000 per month).
AffinHwang Capital also noted that the debt-servicing capacity of the business sector, remained intact at this juncture.
However, on the banking sector near-term outlook, AffinHwang Capital pointed out that a contraction in loans growth is expected for 2020, coming from the auto, residential property, commercial property and trade financing segments.
“Banks continue to face asset quality risks from their O&G portfolio, largely big ones such as Maybank, CIMB, RHB and AMMB. Dividend restrictions may potentially be triggered if BNM decides to take a more cautious stance,” it added.
Despite the headwinds, analysts have also pointed out that Malaysia’s financial institutions are facing these headwinds in a “position of strength”.
“It is without any doubt that banks will be impacted by the twin headwinds of low oil prices and the Covid-19 pandemic.
“We expect asset quality and credit cost will be impacted by rise in delinquencies as economic activities slows especially during the Movement Control Order (MCO).
“However, we believe that the banks are facing these headwinds in a position of strength. Excess capital buffer, which is capital above the regulatory requirements, stood at RM119 billion as at end 2019.
“Furthermore, the continued profitability has further strengthening banks’ solvency positions,” MIDF Amanah Investment Bank Bhd’s research team (MIDF Research) highlighted.
“We are cognisant of the impact that Covid-19, the loan moratorium and MCO will have on banks profitability and asset quality.
“However, we believe that the banks are facing these headwinds in a position of strength due to build up of capital buffer.
“Furthermore, we opine that the moratorium and other measures announced by BNM recently are positive for the banking sector as it addresses the issue of asset quality and liquidity, and to certain extent cost of fund. It provides much breathing space for the banks.
“Therefore, we maintain our ‘positive’ stance on the sector,” it added.