KUALA LUMPUR (Dec 4): Malaysian banks will overcome external headwinds to deliver a resilient operating performance in 2024, according to S&P Global Ratings.

In a statement on Monday, the rating agency said strong domestic economic conditions will support borrowers and limit slippages into non-payment.

S&P Global Ratings credit analyst Nikita Anand said asset quality of Malaysian banks will benefit from the country's stable economic conditions and low unemployment rate.

"Banks are writing back provisions on bad loans, because the Covid hit wasn't as bad as expected.

“That will offset strains on margins in other areas, namely from likely cuts in policy rates later in 2024,” said Anand.

S&P said by its forecasts, Malaysia's strong domestic demand will drive a gross domestic product growth of 4.5% in 2024, higher than 4.0% in 2023.

It said policy rate hikes in Malaysia had been measured and appear to have peaked at 3%.

Similarly, the agency said inflation, although higher than historical levels, had been under control relative to the net oil-importing emerging markets in the region.

Additionally, it said a low unemployment rate limits defaults in household loans, which form about 60% of the banking sector's loan portfolio.

S&P said good domestic conditions had steadily reduced pandemic-related restructured loans, such as borrowings under repayment assistance.

“We expect only a small portion of such loans will be reclassified as non-performing loans (NPLs), as borrowers exit repayment assistance programmes.

“NPLs could peak at levels lower than our forecast of 2.0%-2.5% in 2024,” it said.

S&P said in the first three quarters since end-2022, rated banks in Malaysia saw a manageable three to 14 basis point (bps) increase in NPLs for domestic loans.

It said these had mainly come from small- and mid-sized enterprises and retail borrowers who exited repayment assistance.

NPLs ticked up more in overseas loans, it said.

Anand said overseas loans in higher economic risk markets such as Thailand, Cambodia and Vietnam will continue to face asset-quality stress.

"However, these exposures remain small for Malaysian banks,” she said.

S&P said that for example, Public Bank Bhd's group-level NPLs increased by 16 bps (versus 4 bps in the Malaysian books) since end-December 2022, which was driven by higher NPLs in the Hong Kong and Vietnamese portfolios.

Similarly, it said RHB Bank Bhd's group-level NPLs rose 24 bps (versus 14 bps in the Malaysian books) during this period, which was driven by a 150 bps increase in its Cambodian NPLs, after the country's expiry of Covid-related relief and forbearance.

S&P said Malaysian banks had contained their asset quality risks, and more than adequately provided for potential bad loans.

It said as a result, credit costs (a gauge of provisions for bad loans) had fallen to a very low average of 20 bps of total loans annualised for the nine months ended Sept 30, 2023.

It said this was lower than 30 bps for 2022.

“We expect credit costs to stay low next year, declining closer to the pre-pandemic average of about 15 bps.

“This is given that some large banks still maintain sizeable pandemic-related provisions, which they could write back in 2024, especially if repayment trends continue to be promising,” it said.

S&P said most banks will maintain prudent coverage ratios of 90%-100% of NPLs, higher than pre-pandemic levels, for the next three to four quarters at least.

“An exception to this is RHB Bank.

“The bank's provision coverage of NPLs has fallen to 75%, lower than pre-pandemic coverage of about 85%, and of other rated Malaysian banks,” it said.