Malaysian banks' internal capital generation under pressure from weak margins

Good thing the banks' capitalization is expected to remain robust.

Moody's Investors Service says that the higher capital buffers reported by Malaysia's six large banks for 2015 enhance the banks' resilience against rising credit risks,
particularly in their overseas operations.

"Operating conditions have weakened across the region, and the Malaysian banks have in particular seen the quality of their overseas loan books deteriorate," says Simon Chen, a Moody's Vice President and Senior Analyst.

"However, slower loan growth, optimization of risk-weighted assets and capital raises have improved the banks' capitalization, a credit positive development that should help them weather the increasing challenges," adds Chen.

Here's more from Moody's:

Moody's report highlights that banks with a greater focus on foreign lending, such as CIMB Group Holdings Berhad and Malayan Banking Berhad (Maybank) have seen a greater increase in impaired loans and impairment changes in their key overseas markets of Indonesia, Thailand (CIMB Group) and Hong Kong (Maybank).

By contrast, Public Bank Berhad and Hong Leong Bank Berhad have a stronger home market bias, resulting in more resilient asset quality metrics.

Nevertheless, Moody's expects the banks will also see their domestic asset quality deteriorate from the strong levels of the past three years, as the commodity and manufacturing sectors face increasing pressure from weak external demand and higher funding costs.

Looking ahead, Moody's expects slower revenue growth will hurt the banks' return on assets and internal capital generation in 2016, with the latter already under pressure from weak margins.

The banks have also indicated a slower and more cautious loan growth in overseas markets, and are increasingly focused on risk-adjusted capital allocation to negate the pressure on their capital levels.

Overall, however, Moody's expects the banks' capitalization will remain robust and able to withstand the continuing challenges posed by slowing growth across the region.

Malaysia's six largest banks are Maybank, CIMB Group, Public Bank, RHB Bank Berhad, Hong Leong Bank and AmBank (M) Berhad.