Moody’s sees stable outlook for Malaysian banking system

Singapore, June 23, 2011 -- Moody's Investors Service sees a stable 
outlook for the Malaysian banking system over the next 12-18 months as a 
supportive operating environment and comfortable capital levels outweigh 
concerns over high household leverage and increasing margin pressure from 
competition.

"The healthy state of the operating environment, as reflected in our 
assumption that GDP will grow at 5%-6% and unemployment will stay at 
around 3.3% in 2011-2013, underpins the sector's sustainability in 
earnings, based specifically on revenue growth and low provisioning 
costs," says Karolyn Seet, a Moody's Assistant Vice President.

"We also assume that Malaysia's inflation will be maintained at around 
the 3% level and that overall housing prices will continue to increase, 
but only gradually. Such stable price trends are beneficial to the 
banking sector's funding and asset quality," says Seet.

Seet was speaking on the release of Moody's annual update on the
Malaysian banking system.

Moody's rates 9 commercial banks in Malaysia with their bank financial
strength ratings ranging from C to D. The banks account for 82% of the 
system's assets.

"With an average Tier 1 capital ratio of 13.0% at end-2010, the system 
has sufficient capital to support asset growth in the next 12-18 months 
and an adequate buffer to absorb losses associated with our stressed 
scenarios. In the most stressed case of our scenario analysis, 
Moody's-rated banks would maintain a Tier 1 ratio above 8%," adds Seet.
"In addition, Malaysian banks will not have difficulty meeting the new 
capital requirements stipulated under Basel III."

But there are concerns, including increasing household leverage and 
margin compression arising from intensifying competition.

Household leverage, as measured by household debt to GDP, rose to 76% at 
end-2010 from 69% at end-2006. Although this ratio did not increase in 
2010, it is high compared with other Asian countries with similar income 
levels.

In addition, with 35% of household debt in the form of unsecured debt, 
the financial sector has more exposure to any rise in household
delinquencies, due to higher losses given default, when compared to 
markets where a higher proportion of such debt is secured.

Another uncertainty is the state of global economy's recovery as
Malaysia's economy is dependent on external factors, as indicated by a 
trade volume to GDP ratio of 170%.