Banks are an important barometer to a country’s economy. When banks are in trouble, they could not lend money and this causes businesses to face financial difficulties. Even today, banks are said to have tightened their lending standards and thus many were unable to get loans for their first home. Fitch Ratings in an article in NST said that the banking sectors in Malaysia and Indonesia are the most exposed because of the negative effects from lower commodity prices. Before we start to break cold sweat, Fitch also gave the following remark. “Nevertheless, the major banks in all of these economies look resilient and remain on a stable rating outlook, owing to satisfactory profitability and strong loss-absorption capacity.”
Main reasons stated for the banks’ weakness was due to a few years of slowed GDP growth (Malaysia too), weak world trade (read here), currency depreciation (Yes, ringgit remain weak) and drop in commodity prices. Demand is weak and supply remains almost the same or higher, of course the prices would have to drop. Just look at the high oil price then and the oil price of today. Due to all these, non-performing loans (NPL) are also expected to rise in 2016. Current numbers for NPL for Malaysia is definitely still low. As at end 2015, it is at 1.6 percent (World Bank). In comparison? NPL for U.S. is at 1.5 percent and Australia’s at 0.96 percent at the end of 2015.
In brief, the numbers do not reveal any big vulnerabilities for Malaysia even though a colleague of mine kept saying that Malaysia will soon face bankruptcy. At the same time however, she was still buying properties. I am not sure if she really wanted her prediction to come true. NPL numbers form one huge part of the potential for a potential property bubble forming. Of course, when NPLs start to rise, it would get even harder for banks to approve our loan applications. We should always watch this closely. NPL for Malaysia in 1998? It was 18.6 percent. Happy following.
written on 10 Oct 2016
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