Malaysian banks’ asset quality to deteriorate in 2023 as moratoriums expire

NPL ratio may rise to up to 3% over the next two years.

Malaysian banks’ asset qualities are expected to decline in 2023 as the country’s moratorium programs expire.

The industry non-performing loans or NPL ratio is forecast to rise to 2.5% up to 3% over the next two years, from only 1.8% as of end-June 2022, according to the latest report by S&P Global Ratings.

Loans extended to low-income households and small to medium enterprises or SMEs could be at risk, said Nikita Anand, primary credit analyst, S&P.

“Higher inflation and interest rates are causing further pain,” Anand said, but added that banks' high provisioning buffers should limit additional provisioning requirements despite rising NPLs.

On a more positive note, Malaysian banks’ earnings are expected to improve and inch closer to pre-pandemic levels beginning in 2023.

“Higher margins, moderating credit costs, and a normalized tax rate will drive the improvement. In our base case, we forecast return on average assets of 1.3%-1.4%, compared with 1.1%-1.2% estimated for 2022,” Anand noted.

Higher inflation and interest rates, however, could dampen credit demand and increase default risks for some low-income consumers and SMEs, although these should be manageable.

“Although it is not our base case, a sharp rise in unemployment could also increase asset quality risks for the banking sector,” Anand said.