Outlook negative for top KL banks as economy slows
Outlook negative for top KL banks as economy slows
KUALA LUMPUR (AFP): Standard and Poor's revised yesterday its outlook for two of Malaysia's biggest banks, citing expectations that their asset quality and profitability will decline as the economy slows.
The move implies possible cuts in the "A-plus" counterparty rating for leading commercial bank Malayan Banking Bhd. (Maybank) and the "BBB" counterparty rating for top merchant bank Arab- Malaysian Merchant Bank Bhd.
"Both asset quality and profitability of Malaysian banks will weaken as a result of the anticipated slowdown in the Malaysian economy as the government seeks ways to curb the six percent current account deficit," the credit rating agency said in a statement.
"Although the outlook is for a soft landing, it is expected that this is likely to lead to deterioration in asset-quality problems following a period of strong growth in domestic credit demand and the private sector's presently high leverage," the added.
"The recent drop in the Malaysian ringgit-U.S. dollar exchange rate and local stock market prices over the past two months also are expected to contribute to an increasingly difficult operating environment."
Standard and Poor's said it was particularly concerned that "bank borrowers may not have fully hedged their foreign-exchange positions, which may ultimately lead to increased credit risks being borne by the banking sector.
Oversupply
"There is also increasing concern of oversuppply in some parts of Malaysia's property sector that may lead to further asset quality problems for banks which have direct property exposures or property held as collateral against loans extended," the agency said.
"While Malayan Banking holds a strong and competitive market position, its very size (21 percent of commercial banking assets) means that Maybank is unlikely to avoid the impact of any system- wide difficulty befalling the financial sector."
The agency said it would meet with Maybank's management in coming months to both review its results for the year to June "and assess the probable impact of the impending economic downturn on future performance.
As for Arab-Malaysian Merchant Bank, also known as AMMB, the change in outlook reflects the "perception that the magnitude of recent adverse environmental developments will impose stress on AMMB's asset quality.
"This concern pertains to the bank's exposure, direct and indirect, to the property and share markets. AMMB's loan exposure to the broad property and finance and business service (including investment holding companies) sectors amounted to 44 percent and 27 percent of total loans respectively.
"Investment holding companies are susceptible to the weaker Malaysian stockmarket, affecting their creditworthiness as borrowers," it added.
Standard and Poor's said it would also meet with the bank's management in the next few months to "gauge the degree of stress recent developments are placing on AMMB's performance."