Moody’s downgrades Malaysia banking system outlook to negative

KUALA LUMPUR: Moody’s Investors Service has downgraded Malaysia’s banking to from stable.

“Asset risks for banks will increase while their profitability will decline amid deteriorating economic conditions in the next 12-18 months. Still, robust loan-loss reserves and capitalisation will provide a buffer against growing risks,” Moody’s said in a statement Thursday.

The rating agency has also changed its outlook on 12 Asia Pacific banking systems to negative in light of the coronavirus outbreak and broad economic deterioration.

At the same time, Moody’s has maintained its negative outlook on two banking systems — Hong Kong and Japan — meaning its outlook on 14 systems is now negative.

Moody’s said Malaysia is facing slowing regional growth and trade, while the coronavirus outbreak and subsequent lockdowns that have been in place since mid-March are materially disrupting economic activity. T

It said this would hurt the country’s electronics exports and tourism in particular. In addition, political uncertainty will weigh on business and investor sentiment.

“Banks’ internal capital generation will decline as their profitability weakens. However, weaker loan growth will limit expansion of banks’ risk weighted assets, which will result in stable capital ratios,” Moody’s said, adding that banks’ loan-to-deposit ratios will be stable as deposit and loan growth will broadly match.

“Credit costs will rise from cyclical lows in line with rising asset risks. Net interest margins will decline due to easy monetary policy and weak loan growth. At the same time, continued investment in digital transformation will drive up operating costs,” it said.

In addition, it said the government’s willingness and capacity to support banks in times of need will remain strong.

Moody’s said the outlooks for the Australian, Chinese, Indian, Indonesian, Korean, Malaysian, New Zealand, Philippines, Singapore, Taiwan, Thailand and Vietnam banking systems are changed to negative.

The outlook on the Thailand banking system is changed to negative from positive while the outlook on the Hong Kong and Japan banking systems remains negative.

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