KUALA LUMPUR, Sept 29 — Malaysian banks are well capitalised and liquid enough to withstand unexpected losses that could materialise, said Moody’s Investors Service.

The firm’s financial institutions group analyst Tengfu Li noted that the rating agency had changed Malaysian banks’ outlook to "stable” early this year from negative last year and thus far has retained the stance for several key reasons.

"Malaysian banks had remained profitable this year with some having performed better compared to 2020 for the first half this year,” Li said this during the virtual "Global Islamic Finance Industry Update Media Roundtable” event today. "Although the banks would be impacted due to the extended repayment assistance programme that would affect credit costs and also in terms of profit margins due to a one-time modification cost in the second half, structurally the Malaysian banking system has remained strong enough to withstand distress.”

He noted that Malaysian banks, both Islamic and conventional, have built up a very strong loan loss reserve of about 150 per cent on average and are still increasing to buffer against the repayment aid programme.

"Malaysia also has other structural economic strengths such as its connection to global trade that is improving as well strength in household financial assets to support the system,” he shared.

Looking at South Asia and Southeast Asia Islamic banks’ performance such as Malaysia, Indonesia, and Bangladesh, Li is of the view that it would be broadly similar with the Gulf Cooperation Council countries, that is they would remain resilient amid the coronavirus fallout.

Moody’s said improving operating conditions and structural features will help Islamic banks weather the pandemic with asset quality that has remained stable because of regulatory forbearance and their focus on retail financing.

The rating agency noted that profitability is also recovering partly because of the strong demand for Islamic finance, but will not return to pre-pandemic levels in 2021 amid low rates and high provisioning needs.

The capital and liquidity of Islamic banks have remained well above regulatory requirements and expected more Islamic banks are consolidating and will become more competitive, Moody’s noted.

As for South Asia and Southeast Asia Islamic banks, Li reckons that the operating environment is obviously improving due to the vaccination rollout that has allowed economies to reopen.

Asset quality in Islamic banks in Malaysia, Indonesia, and Bangladesh have also been stable due to regulatory forbearance, and would remain so for 2021 and 2022, he said.

"Similar to GCC countries we see Islamic banks in Malaysia and Indonesia having more retail financing in their book compared to conventional peers.

"This in fact would increase the resiliency against coronavirus fallout given that the asset quality of the retail financing had historically performed better than non-retail financing market.

"This is especially so in markets like Indonesia and Malaysia where they have well established credit bureaus and regulations on consumer lending. In fact, most of this retail financing is secured by residential property,” he said.

On profitability, the Islamic banks in Indonesia and Bangladesh banks’ earnings are expected to remain lower than that of conventional peers because they have modest franchises in a fairly fragmented market.

Conversely, he said the performance of Islamic banks in Malaysia will remain on par with the conventional peers given that they are pretty dominant in their domestic market.

As for capital and liquidity, Moody’s has noted that Islamic banks in Malaysia and Indonesia are well capitalised and liquid and on par with conventional peers but in Bangladesh, they are generally slightly lower due to faster growth as well as limited availability of Shariah compliant Islamic liquid instruments.

On the consolidation scene in Malaysia, Li noted that the last merger happened in 2018 and that any further consolidation in this market would depend on the strategic direction of the stand-alone Islamic banks, given that the largest Islamic banks in Malaysia are subsidiaries of the largest domestic banks. — Bernama