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."