Malaysian banks' profitability stable with reduced intervention risks

Some asset quality deterioration is expected as fuel subsidies ease.

Malaysian banks’ profitability should stay adequate over the next two years, whilst the risk of negative government intervention has lessened, according to S&P Global Ratings.

“In our view, the Malaysian government is unlikely to intervene in the banking system in a manner that could erode financial system stability,” the ratings agency said in a report.

Political stability has resulted in a more favorable policy making environment for banks, S&P said.

Past interventions made by the government during and following the pandemic– which include moratorium programs for all retail and SME customers, prolonged restructuring of loans, a one-off prosperity tax, and interest waivers to low-income households– also had limited impact on the banking sector.

"Broadly steady macroeconomic and labor market conditions should support the Malaysian banking sector's performance over the next two years," said S&P Global Ratings credit analyst Nikita Anand. 

"Banks' profitability should stay adequate over the next two years despite competitive pressures," Anand added.

Local banks’ adequate provisioning and healthy capitalization is expected to cushion a moderate rise in credit stress over the next few quarters. 

However, asset quality is expected to see some deterioration on the back of the government possibly cutting or easing fuel subsidies. This could hit lower-income households, Anand said.

Economic risks facing banks could rise in case of a sharp deterioration in unemployment rates or a disorderly correction in property prices.