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PROPERTY loans remain the biggest threat to Malaysian banks next year amid rapid price appreciation in recent years, according to Moody’s Investors Service Inc.

The rating agency’s 2020 outlook report for Asia-Pacific banks stated that risks from property loans will persist in Asia Pacific, but pose a greater risk for banks in Malaysia, Australia and New Zealand.

It said elevated property prices will remain a key risk for many banking systems in Asia Pacific, mainly due to rapid price appreciation in recent years.

“Despite the cooling of price growth in some markets in recent years, lower interest rates in Asia Pacific can lead to a renewed surge in property prices, which would be credit negative for banks,” the rating firm added.

Overall, Moody’s outlook for the banking industry in Asia Pacific is negative over the next 12 months as the US-China trade dispute will weaken economic and trade activity in the region and erode investors’ confidence.

The report covers 17 banking systems in Asia Pacific, namely Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, South Korea, Malaysia, Mongolia, New Zealand, the Philippines, Singapore, Sri Lanka, Taiwan, Thailand and Vietnam.

VP and senior credit officer Eugene Tarzimanov said weaker economic and trade conditions will lead to moderate increases in problem loans for Asia-Pacific banks.

“The banks’ profitability will fall because they are raising credit provisions, while central banks are cutting interest rates to support economic growth,” Tarzimanov said.

Nevertheless, Moody’s said Asia-Pacific banks have generally maintained good capital and liquidity buffers, and the probability of government support for these banks will stay high.

Except for the banks in Hong Kong, the territory is the only jurisdiction in Asia Pacific with an operational resolution regime.

“Asia-Pacific governments will continue to support banks in case of need. Reflecting this, the senior unsecured and deposit ratings of most banks in the region include uplift in government support,” it stated.

The report also pointed out that while high private sector leverage poses a risk to many of the region’s economies, the build-up in leverage is generally moderating.

The report also noted that environmental, social and governance risks will increasingly affect the creditworthiness of Asia-Pacific banks.

“Central banks are cutting interest rates to support economic growth, however, a more accommodative monetary policy will depress interest margins for banks.

“Also, weaker operating conditions will lead to moderately higher asset risks for banks,” it said.

Last year, Moody’s 2019 outlook report for Asia-Pacific banks had similar view on property loans posing threats to Malaysian banks.

The report also highlighted Malaysia as one of the Asia-Pacific economies that saw the steepest increase in residential property prices over the last eight years.

News Source: TheMalaysianReserve, 10 Dec 2019.

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