Malaysia’s three largest banks by assets face growing pressure on profitability from the coronavirus-led downturn, Moody’s Investors Service said.

This was because their asset quality was likely to deteriorate from 2021 as loan repayment moratoriums expire.

The three banks are Malayan Banking Bhd (Maybank), which is rated A3 stable by Moody’s, CIMB Group Holding Bhd (Baa1 stable) and Public Bank Bhd (A3 stable).

Moody’s latest assessment follows the release of the three banks’ first quarter results recently.

Moody’s vice president and senior credit officer Alka Anbarusa said a sharp increase in credit costs and contracting net interest margins (NIMs) would weigh on the profitability of all three banks this year.

“The impact on asset quality will become evident only from 2021 as a large share of loans will remain under moratoriums for most of the year,” said Anbarusa.

According to Moody’s, the impaired loans would increase as macroeconomic conditions weaken.

It said in the three months through the end of March, impaired loans ratios increased 36 basis points to 3.4 per cent at CIMB Group and 7.0 basis points to 2.7 per cent at Maybank.

This was largely driven by new impairments in Singapore and Indonesia.

By contrast, iasset quality at Public Bank, which is more focused on the Malaysian market, was more stable.

But Moody’s said that was also because about 80 per cent to 90 per cent of Public Bank’s loans were under loan repayment moratoriums.

“So far, at CIMB Group and Maybank too, about 45 per cent to 50 per cent of loans are under moratoriums.

“We expect domestic nonperforming loans (NPLs) will start increasing across the sector in 2021 after the moratoriums are lifted,” it said.

The firm said profitability would weaken as credit costs increase and NIMs contract.

It said increases in credit costs amid deteriorating asset quality and the contraction of NIMs as a result of policy rate cuts would weigh on profitability.

NIMs will contract at most banks in 2020 as policy rate cuts by the central bank lead to declines in lending rates.

“Strong loss absorbing buffers will help mitigate increases in asset risks.

“Ratios of loan loss reserves, including regulatory reserves, to impaired loans remained above 100 per cent at most banks at the end of March 2020,” it said.

Apart from that, it said capitalisation would remain stable as capital generation would outpace capital consumption due to weaker loan growth.

“Liquidity will remain strong, underpinned by deposit growth.

“The share of low-cost current and savings accounts (CASAs) in total deposit mixes increased 400 basis points at Maybank and 200 basis points at CIMB Group as these deposits grew faster than their normal pace,” it added.