Banking sectors in Malaysia, and in the region, would likely to face a challenging 2016 as financial systems adjust to slowing growth in China and the prospects of higher US interest rates, according to Fitch Ratings\u2019 2016 Outlook Report.<\/p>\n
As a result, Fitch Ratings has revised the outlook for Malaysian banks to negative in 2016, due to deteriorating asset quality and a more cautious risk appetite from most banks contributing to weaker credit growth, and margin pressures, all of which were likely to lead to slower profit growth.<\/p>\n
In a statement, the rating agency said with persistently low commodity prices, weak external demand and low domestic sentiment, it believes there is a risk to the country’s gross domestic product (GDP) growth.<\/p>\n
It is evident that some borrowers are facing difficulty in adjusting to the substantial slide in currency over the past 12 to 18 months, said Fitch.<\/p>\n
\u201cWe believe these developments translate into lower loan growth and higher credit costs in the next one to two years,\u201d it said in a report on 2016 Outlook: Asia-Pacific Banks<\/em> released today.<\/p>\n Non-performing loan (NPL) formation is expected to continue to rise into 2016.<\/p>\n \u201cThe gross impaired-loan ratio \u2013 still steady at the long-term low of 1.6% at end-October 2015 \u2013 should increase, amid a more challenging environment.<\/p>\n \u201cDelinquencies over the past 12-18 months have largely been from troubled industries offshore such as the commodity sector in Indonesia, but we expect deterioration in banks\u2019 domestic portfolios to emerge in 2016,\u201d it said.<\/p>\n Despite the tough sector outlook, Fitch\u2019 rating outlooks remain mostly stable, as banks\u2019 profitability and other loss-absortion buffers are expected to provide a sufficient cushion against the projected rise in impairment costs, broadly preserving their credit profiles, amid the anticipated downturn.<\/p>\n The ratings could face further downward pressure, Fitch warned, due to extended economic weakness, where significantly higher unemployment and a potential pull-back in lending would hurt banks\u2019 asset quality, profitability and capitalisation.<\/p>\n \u201cExports and private domestic demand are the two largest drivers of the economy. Stronger global growth leading to more robust demand for Malaysia\u2019s exports, or a convincing rebound in business and consumer sentiment \u2013 without excessive credit growth or inflation \u2013 would reduce the risks to GDP and banks\u2019 asset quality,\u201d it noted.<\/p>\n