Moody’s says rising office space glut may hit banks

Moody’s says the exposure of banks to the commercial real estate sector is cause for concern.

KUALA LUMPUR: Moody’s Investors Service feels the banking sector is stable but worries about the effect of the increasing over-supply of office and commercial space on banks which have lent to developers.

Simon Chen, Moody’s vice-president and senior analyst for financial institutions, told The Edge in an interview that the asset quality of Malaysian banks would likely remain stable over the year to a year and a half.

He expects the pace of new non-performing loans (NPLs), which slowed last year compared with 2016, to remain slow over the next 12 to 18 months, thereby stabilising asset quality.

“Although the NPL ratios of some banks have crept up in 2017, the pace of increase has moderated from a slower NPL formation rate,” he was quoted as saying.

However, the exposure of banks to the commercial real estate sector is cause for concern.

Previously, the concern was over the oil and gas sector, the main source of high loan loss provisions for banks in 2016 as global oil prices fell to new lows, but that is being well monitored.

“We are increasingly concerned about the commercial real estate sector, where there is quite a strong pipeline of new supply of office buildings and shopping malls.

“We’re seeing high vacancy rates and there is potential that the vacancy rates will increase further when the new supply comes onstream, and that may impact the fundamentals of the commercial real estate sector.

“So, that may create some asset quality pressures for some of the banks.”

The Edge quoted Chen as saying: “I would say that all the banks are exposed, to some extent, to that sector and the issues are likely to be idiosyncratic to the developers that they are lending to, and the projects they are lending to.

“But, by and large, the risk should be manageable, given that the exposure is around 3% to 4% of total loans on the average.”

He is less concerned about the banking sector’s exposure to mortgages than commercial real estate. Mortgages make up the largest portion of banks’ property exposure, according to the report.

On the whole, Chen said banks’ asset quality would stabilise further this year on the back of improving macroeconomic conditions.

The industry’s gross impaired loan ratio improved to 1.53% as at December 2017, compared with 1.61% a year ago.

Commercial property glut poses risk to Malaysian banks, says Moody’s