Malaysia Banking Sector Update Asset Quality Recovery Delayed

Nancy Duan Malaysia Banking Sector Update Ivan Tan Asset Quality Recovery Delayed Beyond 2021 Geeta Chugh April 12, 2021 Key Takeaways

– Higher stress on asset quality could come from wholesale and retail trading, construction, transport, and household sectors when the debt moratorium on retail and SME segments is being phased out.

– We have revised down our sector credit growth to 6.0% from 8.0% previously as a result of lower GDP growth projection. Growth will be driven by secured consumer lending and pent-up business loan demand.

– Strong capital and funding positions anchor Malaysian banks’ stand-alone credit profiles but their negative rating outlook highlights the weakened credit standing of the Malaysia sovereign amid the pandemic’s hit to the economy.

2021 Recovery May Be Weaker On COVID Travel Restrictions

Our recent revisions of GDP growth and unemployment rate forecast for Malaysia

10% 6.0% – S&P recently revised down its 2021 GDP 8% 5.5% forecast for Malaysia to 6.2% from 7.5% previously. 6% 5.0% 4% 4.5% – Meanwhile, unemployment rate is also 2% 4.0% expected to stay higher for longer. 0% 3.5% -2% – The downward revisions are prompted by the 3.0% -4% renewed economic weakness in 1Q 2021.

-6% 2.5%

-8% 2.0% 2019 2020 2021f 2022f 2023f 2024f

Real GDP Growth@Mar2021 (left scale) Real GDP Growth@Nov2020 (left scale) Unemployment Rate@Mar2021 (right scale) Unemployment Rate@Nov2020 right scale) f--Forecast. Source: S&P Global Ratings.

Still Far From Business-As-Usual For Malaysia’s Economy

– Resurgence of COVID-19 infections and the reintroduction of domestic travel restrictions delay recovery. – Normalization of business activities is only expected after vaccine rollout to achieve herd immunity.

Google Mobility Data Suggests Residents’ Activities Remain Strained COVID Cases Better Contained By Recent Movement Controls

Retail and recreation Transit Workplace Residential Reported daily new COVID-19 cases in Malaysia

60 7000

40 6000 20 5000 0 4000 -20 3000 -40 2000 -60

-80 1000

-100 0 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21

Source: Google, S&P Global Ratings. Source: Our World in Data, S&P Global Ratings.

Delayed Crystallization Of Stressed Asset Led To Provisioning Jump

– Significant decline of moratorium credits after 3Q 2020 reveals credit transition. – Credit cost will remain elevated in 2021 after reaching a decade high last year.

Steep Decline Of Moratorium Coverage Since Last Sept. Only Moderate Rise Of NPL Ratio But Substantial Growth In Provision

Jun-20 Dec-20 Feb-21 Credit cost (right scale) Industry NPL ratio (left scale) Bps 80% 3.0% 90

70% 80 2.5% 60% 70 2.0% 60 50% 50 40% 1.5% 40 30% 1.0% 30 20% 20 0.5% 10% 10 0% 0.0% 0 Moratorium coverage (%) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: S&P Global Ratings estimates. NPL--Nonperforming loan. Bps-- Basis points. Source: S&P Global Ratings, bank reports.

2020 Year-End Industry NPL Ratios Distorted By Moratorium

– We expect NPL ratios in wholesale and retail trade and construction to deteriorate more visibly. – Credit trends of banks’ retail portfolio will diverge as crisis tests the resilience.

Sector-Wise NPL Ratio Trending Up For Agriculture And Consumer Credits Could Face Higher Pressure As Stage 2 Ratio Transportation Rises To 7.3% By End-2020 Dec-19 Dec-20 Dec-19 Dec-20

Agriculture Purchase of securities Mining Purchase of transport vehicles Manufacturing ow, purchase of passenger cars Utilities Purchase of residential properties Wholesale and retail trade Purchase of non-residential properties Construction Purchase of fixed assets other than… Transport, storage and communication Personal loans Financial services Credit card Education and health Construction Household Working capital Other sectors Other purposes Total Total

0.0% 2.0% 4.0% 6.0% 0.0% 2.0% 4.0% 6.0% 8.0%

NPL--Nonperforming loan. Source: Bank Negara Malaysia, S&P Global Ratings. Source: Bank Negara Malaysia, S&P Global Ratings.

Banks’ NPL Ratios Started Trending Up Since 4Q 2020

Banks’ 4Q NPL Ratios Could Increase More Visibly Excluding Write-offs And NPL Sale

4Q2019 1Q2020 2Q2020 3Q2020 4Q2020 4Q2020a – 4Q 2020 NPL ratios of major banks 4.5% weakened more after adjustments.

4.0%

3.5% – Recovery prospects of major Malaysian banks’ regional markets vary. 3.0%

2.5% – Small banks are more vulnerable compared 2.0% with bigger lenders on thinner buffer. 1.5%

1.0%

0.5%

0.0% Maybank CIMBG Public RHB Hong AMMB Affin Bank Alliance Industry Bank Leong Bank Bank

NPL--Nonperforming loan. a--Actual. Source: S&P Global Ratings, banks’ reports.

Substantial Build-up Of Stage 1 And 2 Allowances Throughout 2020

– Local banks could maintain their high stage 1 and 2 allowance coverage in most of 2021. – We also expect banks to look at NPL sales more actively.

Trends Of Local Banks' Stage 3 Coverage Fluctuate On Write-offs, NPL Malaysian Banks Significantly Strengthened Their Stage 1 And 2 Sales And ECL Model Assumption Changes Allowances In 4Q 2020 After The Expiry Of Blanket Moratorium 1Q2019 2Q2019 3Q2019 1Q2019 2Q2019 3Q2019 4Q2019 1Q2020 2Q2020 4Q2019 1Q2020 2Q2020 3Q2020 4Q2020 Industry level as of Dec-2020 3Q2020 4Q2020 Industry level as of Dec-2020 70% 1.8% 60% 1.6% 1.4% 50% 1.2% 40% 1.0% 30% 0.8% 0.6% 20% 0.4% 10% 0.2% 0% 0.0%

NPL--Nonperforming loan. ECL--Expected credit loss. Source: S&P Global Ratings, banks’ reports. Source: S&P Global Ratings, banks’ reports.

Asset Quality Recovery To Be Delayed Beyond 2021

We Expect COVID-19’s Hits On Asset Quality To Materialize This Year

Dec-2019 Dec-2020 Dec-2021f Dec-2022f – Our base case assumes the industry maintains its end-2020 allowance coverage. Gross loan growth (%) 3.9% 3.4% 6% 5%

Gross NPL ratio (%) 1.5% 1.56% 2.5-3.0% 3.0-3.5% – We expect more stresses from agriculture, Credit cost (bps) 8 79 60-70 40-50 domestic trade, construction, transport, and consumer lending. f--Forecast. NPL--Nonperforming loan. Source: S&P Global Ratings.

Industry Credit Cost Peer Comparison – Malaysian banks, however, face this 2019 2020 2021f 2022f downturn from a position of strength. 4.00% 3.00% 2.00% 1.00% 0.00% Malaysia Singapore Philippines Vietnam Thailand China Indonesia India f--Forecast. Source: S&P Global Ratings.

Net Interest Margin And Profitability Only Recover Slowly This Year

– Less near-term upside for net interest margin (NIM) as Bank Negara Malaysia is likely to keep policy rate low. – Bottomline performance could stay muted in 2021 on the elevated credit cost.

Industry NIM To Stabilize In The Next 12-24 Months Sector ROA And ROE Are Likely To Stay Depressed In 2021

NIM (left scale) Policy rate (right scale) ROE (right scale) ROA (left scale) 2.3% 4.0% 1.8% 20% 1.6% 18% 2.2% 3.5% 1.4% 16% 14% 1.2% 2.1% 3.0% 12% 1.0% 10% 0.8% 2.0% 2.5% 8% 0.6% 6% 1.9% 2.0% 0.4% 4% 0.2% 2% 1.8% 1.5% 0.0% 0%

f--Forecast. NIM-- Net interest margin. Source: S&P Global Ratings. ROE--Return on equity. ROA--Return on assets. Source: S&P Global Ratings.

Strong Capitalization And Funding Support Creditworthiness

– Strong capital position and funding/liquidity conditions are critical buffers to the downside. – We expect loan growth to slightly outperform deposit growth over the next two years.

Rated Malaysian Banks’ Capital Position Progressively Enhanced Liquidity Conditions Remain Supportive In the Near Term

Weighted average S&P RAC ratio of rated banks* Liquidity coverage ratio Loan-to-deposit ratio 10.5% 90%

10.0% 88% 9.5% 86% 9.0% 84% 8.5%

8.0% 82%

7.5% 80% 2015 2016 2017 2018 2019 2020 2021f 2022f 7.0% 2016 2017 2018 2019 2020 2021f 2022f 125% 124% 135% 143% 149% 148%

Source: S&P Global Ratings. *S&P rated Malaysian banks include Maybank, CIMB, RHB Bank, Public Source: S&P Global Ratings. Bank, and AmBank (M) Bhd.

Bank Ratings Carry Negative Outlook On Sovereign

– We believe the stand-alone credit profiles of rated Malaysian banks remain sound. – Downside risks to bank ratings stem from the sovereign outlook at this point.

Bank SACP Ratings/Outlook Comments

Maybank a- A-/Negative/A-2 Negative outlook on sovereign rating cap

CIMB Bank a- A-/Negative/A-2 Negative outlook on sovereign rating cap

Public Bank a A-/Negative/A-2 Negative outlook on sovereign rating cap

RHB Bank bbb BBB+/Negative/A-2 Negative outlook on likely reduced sovereign capacity to support

AmBank bbb BBB+/Negative/A-2 Negative outlook on likely reduced sovereign capacity to support

Source: S&P Global Ratings.

Rating Scores For Individual Banks

Maybank CIMB Bank Public Bank RHB Bank AmBank (M) Bhd.

Anchor bbb bbb bbb bbb bbb

Business position Strong (+1) Strong (+1) Strong (+1) Adequate (+0) Adequate (+0)

Capital and earnings Adequate (+0) Adequate (+0) Adequate (+0) Adequate (+0) Adequate (+0)

Risk position Adequate (+0) Adequate (+0) Strong (+1) Adequate (+0) Adequate (+0)

Above average and strong Above average and strong Above average and strong Average and adequate Average and adequate Funding and liquidity (+1) (+1) (+1) (+0) (+0)

SACP a- a- a bbb bbb

Systemic importance High High High Moderate Moderate

Sovereign support +0 +0 +0 +1 +1

ICR A-/Negative/A-2 A-/Negative/A-2 A-/Negative/A-2 BBB+/Negative/A-2 BBB+/Negative/A-2

Source: S&P Global Ratings.

Analytical Contacts

Nancy Duan Ivan Tan Geeta Chugh Associate Director Director Senior Director [email protected] [email protected] [email protected] +65-6236-1152 +65-6239-6335 +91-2233-4219 10

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