Malaysia’s banking sector went through many years of painful restructuring after the Asian financial crisis and consequently sailed through the global version a decade later largely unscathed. The banks are well capitalized, diversified and largely well run; the main potential headwind is a flagging domestic economy.
It is interesting that Malaysian banks have held up in the face of the sell-off of emerging market stocks, and as of August were trading at a modest premium to the average for Asean banks. Nomura expects loan growth to moderate to 9% in the 2013 fiscal year, from 10% in 2012, and return on equity to trend lower by about one percentage point (it’s around 15% today) over the next few years as banks build their core equity ratios as part of Basle III. Gross non-performing loans look reasonable, at 1.96% of total loans in June, and deposits are growing at 8% a year.
That said, Credit Suisse downgraded Malaysia (and Thailand)’s banking sectors from overweight to market weight in August, blaming the surge in household debt. "The biggest positive about Malaysia is that it is a defensive market," says Credit Suisse in an August report. "However, with GDP and corporate sales slowing and real interest rates rising sharply when the country has been piling up debt, [it] is not an ideal operating backdrop, especially for banks."
