Malaysia's Banking Sector Remains On Sound Footing

Fitch Solutions / Banking & Financial Services / Malaysia / Mon 18 Jul, 2022

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Key View

  • We at Fitch Solutions expect Malaysia’s banking sector to remain stable over the coming quarters.
  • Non-performing loans will likely pick up as support measures are gradually phased out amid the ongoing economic recovery, but robust capital buffers and loan loss provisions should underpin the resilience of the banking system.
  • We have revised our credit growth forecast down to 5.0% in 2022, from 5.5% previously, due to tightening financing conditions and mounting economic growth headwinds.

We at Fitch Solutions expect the Malaysian banking sector to remain stable, underpinned by strong capitalisation buffers and loan loss provisions. This is despite a likely deterioration in asset quality over the coming quarters, as support measures are phased out amid improving economic prospects and as economic scarring from the pandemic begins to feed through. We still expect an acceleration in loan growth in 2022 (versus 2021) as demand for business loans is likely to increase as companies invest to ride the recovery, while consumer loans are likely to continue picking up due to pent-up demand. However, we have revised down our credit growth forecast to 5.0%, from 5.5% previously, due to tightening financing conditions which will likely result in faster loan repayments. Broader economic growth headwinds are mounting too.

Loan Growth Still To Pick Up In Line With The Economy

Malaysia - Real GDP & Credit Growth, %

f = Fitch Solutions forecast. Source: Bank Negara Malaysia, Fitch Solutions

We expect non-performing loans to rise over the coming quarters following the tapering of support measures since Q122. The gross impaired loans ratio has remained relatively stable at 1.6% in May, similar to the last two months, but was up marginally from 1.5% at the start of the year. Despite the economy contracting by 5.6% in 2020 and expanding by only a below-trend 3.1% in 2021, the gross impaired loan ratio has remained extremely stable within a tight range of 1.4-1.6%. We attribute this to the loan moratoriums and other support measures such as loan restructuring that have been implemented during 2020-2021, delaying the recognition of NPLs. According to BNM, more than 2.7 million individual borrowers and 95,700 SME borrowers had obtained repayment assistance between 1 June 2021 and 24 December 2021.

Most of these measures have since expired at the end of 2021, except for the Financial Management and Resilience Programme (URUS) for B50 individuals (those with monthly income of MYR5,880 or lower) and the AKPK Financial Resilience Support Scheme (FIRST) for SMEs which allow for reduced instalments for up to two years, which will expire sometime in 2024. Meanwhile, a new moratorium (Flood Relief Assistance Programme) was extended to B50 borrowers and businesses affected by the serious floods in the beginning of 2022.

Provision Coverage Falling But Remaining Above 100%

Malaysia - Gross Impaired Loans, % of total & Total Provisions, % of impaired loans

Source: BNM, Fitch Solutions

Despite the likely increase in non-performing loans over the coming quarters, we expect the banking sector to remain resilient, support by robust capital buffers and provisioning. According to BNM, total provisions still stood at 109.1% of impaired loans in May, even though the ratio peaked in November 2021. Meanwhile, the banking sector reported a CET1 capital ratio of 14.3% and total capital ratio of 17.9%, representing an excess capital buffer of MYR121.5bn above the regulatory minimum, which includes the capital conservation buffer (CCB) of 2.5% and other, more stringent bank-specific requirements.

Well Above Regulatory Minimum

Malaysia - Total Capital Ratio, %

Source: BNM, Fitch Solutions

We continue to expect credit growth in 2022 to surpass that in 2021, in line with the ongoing economic recovery, but have lowered our forecast for the year to 5.0%, from 5.5% previously. In May, the banking system saw total loan growth of 5.0% y-o-y, stable from April, and up from 4.5% at end-2021, but we see little scope for a further acceleration over the coming months. Loan repayments will likely pick up in the face of rising interest rates while new loan disbursements will likely moderate due to a softening economic backdrop. BNM has already hiked its policy rate by a cumulative 50bps (to2.25%) at its last two monetary meetings in May and July, and we expect an additional 50bps of hikes before end-2022. Furthermore, we have lowered our 2022 real GDP growth forecast for Malaysia to 5.2%, from 5.6% previously, given the weaker outlook for net exports due to weakening global growth prospects and tightening monetary policy around the world.

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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