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RAM Ratings has stable outlook on Malaysian banking sector.

The Malaysian banking sector's fundamentals remained resilient in 2012, despite the ongoing concerns in Europe and the US pertaining to slow economic growth, sovereign debt woes and fiscal issues.

"Parameters that we keep close tabs on - such as asset quality, liquidity and funding, profitability and capitalisation - continue to show up favourably on our radar," said RAM. Against this setting, RAM Ratings has reiterated the stable outlook on the Malaysian banking sector.

For 2013, RAM's views and expectations on the Malaysian banking sector include the following:

* Raising the bar on supervision of financial-services groups * Loan base to expand nine per cent-10 per cent in 2013 * Asset quality to remain robust * Stable funding and liquidity positions * Smooth transition to Basel III capital framework * Regionalisation a common theme

On the heels of a 5.6 per cent GDP expansion last year and supported by accommodative monetary conditions, strong domestic demand and increased government spending on infrastructure projects, the Malaysian economy is anticipated to expand 5.3 per cent this year.

"Much of the banking system's soundness is attributable to Bank Negara Malaysia's (BNM) robust regulatory and supervisory regimes. Recently, the Financial Services Bill 2012 and the Islamic Financial Services Bill 2012 have been passed. These include the implementation of a capital framework for financial-services groups. We believe that the new legislation is a positive development that will ensure effective and holistic supervision of the banking industry. The enhanced supervisory regime will fortify the Malaysian banking system and promote sustainable growth in the long run," explained Wong Yin Ching, RAM's Co-Head of Financial Institution Ratings.

The banking sector's loan growth will be driven by strong private consumption and the financing requirements for the various projects outlined under the government's 10th Malaysia Plan and the Economic Transformation Programme, although some of this funding will be derived from the debt capital market. Coupled with a still-conducive borrowing environment, we expect the banking system's loan growth to come in at 9 per cent-10 per cent in 2013, close to last year's 10.4 per cent.

RAM opines that the Malaysian banking system's fundamentals have remained healthy. "The industry's gross impaired-loan ratio had improved to an all-time low of two per cent and it is expected to be kept stable with the credit cost ratio of about 0.3 per cent. The segment that we are watching a bit more closely is personal financing, especially for the lower-income group, as this category of borrowers may be more susceptible to income shocks and inflationary pressures. In addition, we are monitoring the impact of the newly-implemented minimum wage policy on the manufacturing segment. The export-oriented segment is also more sensitive to external uncertainties," she added.

"While some banking systems abroad have had to contend with liquidity concerns, the Malaysian system is still flush, with a loan-to-deposit ratio of 77 per cent as at end-January 2013. This will allow banks to continue supporting credit expansion. Nonetheless, we note that competition for current- and savings-account deposits has been fierce as banks attempt to shore up their low-cost deposits to improve their funding costs," stated Sophia Lee, RAM's Co-Head of Financial Institution Ratings.

"In November 2012, BNM released its guidelines on the calculation of regulatory capital under Basel III. On the whole, we expect all banks to meet a common-equity tier-1 ratio of 7 per cent at both their consolidated and entity levels before full implementation of these guidelines in 2019. To this end, we note that the Malaysian banking system's capitalisation levels, while sound, are slightly lower than those of Singapore and Indonesia," observed Sophia.

Malaysian banks have also been enjoying strong profits in recent years, underpinned by healthy loan growth and lower impairment charges. Nonetheless, pressure on margins amid keen price competition on both loans and deposits is expected to persist.

"On this note, we observed that banks have been expanding beyond the local shores as the domestic marketplace becomes increasingly more saturated," said RAM. "Regionalisation, whether through mergers and acquisitions or organic growth, has been a common theme for Malaysian banks. While recognising the stronger franchises and income diversity arising from regional expansion, we are also mindful of the added risks involved in banks' overseas operations. We note, however, that these exposures have generally remained sound thus far."

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Publication:CPI Financial
Date:Mar 18, 2013
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