Kuala Lumpur, 22 May 2021 – Moody’s Investors Service says Malaysia’s A3-stable rated banks are cushioned by the country’s diversified economy, competitive markets and commodity wealth, allowing lenders to stay profitable despite a pandemic-induced recession that shaved 5.6 % off 2020 gross domestic product. The rating agency expects GDP to rebound above 5 % in 2021, supported by manufacturing, services and government stimulus, while warning that household debt has jumped to 93.3 % of GDP and could pressure bank asset quality if the recovery stalls.
Growth engines remain intact
Moody’s credits Malaysia’s broad economic base for keeping credit losses lower than in single-commodity peers. “The country’s well-developed infrastructure, deep manufacturing sector and sizeable services industry provide multiple sources of income,” the agency wrote in a sector report released on Friday. Natural gas, palm oil and rubber add fiscal firepower, but no longer dominate output; today they account for less than 15 % of GDP, down from 30 % two decades ago.
The same diversity helped banks stay in the black last year. Net interest margins narrowed only 11 basis points, according to Bank Negara Malaysia data, as lenders shifted from consumer to trade finance and tapped capital-market fees. Moody’s forecasts system-wide return on assets at 1.1 % for 2021, barely changed from 2019 levels.
Policy record underpins stability
Strong institutions explain why profitability held up, Moody’s says. “Malaysia’s executive and legislative branches have a long track record of counter-cyclical policy,” senior analyst Simon Chen told reporters. Fiscal packages worth RM 530 billion, about 36 % of GDP, kept households and small firms liquid, while an automatic six-month loan moratorium prevented a surge in non-performing loans.
Inflation has stayed below 3 % for a decade, giving the central bank room to cut the policy rate by 125 basis points in 2020. The overnight rate now sits at 1.75 %, among the lowest in emerging Asia. “This policy space is a key credit strength,” Chen added, noting that banks passed the lower funding cost to borrowers while retaining deposit inflows.
Household debt climbs to record
The flip side of easy credit is use. Household debt rose to 93.3 % of GDP in December 2020 from 82.9 % a year earlier, driven mainly by the denominator shrinking rather than fresh borrowing. Still, the ratio is the highest since records began in 2002 and well above the 71 % median for A-rated sovereigns.
Moody’s sees pockets of risk in unsecured personal loans and residential mortgages originated in 2018-19, when house prices peaked. “If labour-market scarring persists, we could see NPLs in the retail segment rise toward 2.5 % by mid-2022,” the report warns. Corporate use is lower, but small and medium enterprises, half of bank credit, remain vulnerable to renewed movement restrictions.
Bank Negara governor Nor Shamsiah Mohd Yunus acknowledged the concern last week. “We are monitoring debt-service ratios closely,” she said, adding that targeted repayment assistance remains available for borrowers who have not returned to full income.
Vaccine pace shapes recovery path
How fast Malaysia can tame Covid-19 will determine whether use turns into losses. The country began mass vaccination in February and has secured 45 million doses for 2021, enough to cover 140 % of the adult population. Daily infections have fallen below 4,000 from a January peak of 5,725, allowing Kuala Lumpur and Selangor to reopen most factories.
Moody’s base case assumes 70 % of adults receive at least one shot by September, enabling domestic demand to “normalise” in the fourth quarter. Under this scenario, GDP expands 5.5 % in 2021 and 5.8 % in 2022, pulling the budget deficit back to 4 % of GDP. A slower roll-out that triggers another nationwide lockdown would cap growth at 3 % and push banking-sector credit costs to 80 basis points, double the agency’s current forecast.
Finance minister Tengku Zafrul Aziz struck an optimistic tone on Thursday. “We are on track to reach herd immunity by October,” he said, pointing to an average 200,000 daily jabs this week. Export orders for semiconductors and medical gloves, he added, are already “well above pre-crisis levels.”
Commodity windfall offers buffer
Global prices are lending a hand. Brent crude has averaged USD 65 a barrel this quarter, double the budget assumption, while palm oil futures touched an all-time high of RM 4,500 per tonne in early May. Each USD 1 increase in oil adds roughly RM 300 million to federal revenue, according to finance ministry estimates, giving Putrajaya room to extend wage subsidies or bankroll another loan-guarantee scheme.
For lenders, the commodity boom translates into healthier corporate cashflows and lower impairment charges in the energy and plantation books. Moody’s notes that Maybank, CIMB and RHB, whose combined market share tops 55 %, all have less than 5 % direct exposure to oil-and-gas borrowers, limiting upside but also downside volatility.
The agency kept the banking-sector outlook at “stable” on Friday, citing adequate capital buffers. The common equity tier-1 ratio stood at 14.7 % in March, well above the regulatory minimum of 7 %. “Banks enter the recovery phase with some of the strongest loss-absorption metrics in ASEAN,” Chen said.
Malaysia’s lenders therefore look set to ride out the year even if global reflation stumbles. Yet the legacy of higher household debt means credit growth will likely cool to 3-4 % in 2022 once subsidy schemes expire. Whether profits can stay robust will depend less on balance-sheet size and more on how quickly wages recover, and on the pace of those jabs in the months ahead.
