KUALA LUMPUR, March 23 — RAM Rating Services Bhd expects Malaysian banks are resilient enough to weather escalating headwinds on both the domestic and global fronts which pose greater downside risks to their performance this year.

Its co-head of financial institution ratings, Wong Yin Ching believed that banks have strong fundamentals and prudent risk management to weather the storm.

In a statement today, the credit rating agency said while it has maintained a stable outlook on the local banking sector this year, banks are facing heightened uncertainties and challenges in the still-evolving economic landscape.

These include loan expansion to moderate to between 1.0 per cent and 2.0 per cent from +3.9 per cent last year, asset quality indicators to weaken with a gross impaired loan (GIL) as well as credit cost ratios increase.

In the meantime, capital buffers to remain sturdy, while funding as well as liquidity to stay healthy and softer profitability amid slower credit growth, compressed net interest margin (NIM) and heftier credit losses.

“We expect banks to closely monitor their credit exposures amid the present challenging scenario and envisage a pick-up in rescheduling and restructuring (R&R) activities,” RAM’s co-head of financial institution ratings, Sophia Lee said.

In light of Covid-19 impacts on certain sectors and the collapse of oil prices, fresh risks may emanate from the oil and gas sector as the steep drop in oil prices threatens to derail recovery charted by the industry in the last two years.

Apart from pressures on asset quality, RAM Rating noted that Malaysian banks’ loan growth has been dwindling even before the onset of challenges brought on by Covid-19.

“For now, we have pencilled in loan growth of between 1.0 per cent and 2.0 per cent for 2020 compared with +3.9 per cent in 2019 but we highlight downside risks to our forecast given the evolving nature of the current environment,” said Lee.

In the event economic conditions worsen drastically, RAM Rating foresee that it could be challenging for the banking system to achieve even a 1.0 per cent loan growth this year.

Looking ahead, the credit rating agency said topline pressure and potentially heavier impairment charges amid the current environment could dent banks’ earnings this year. — Bernama