Malaysian banks will endure a downside case of a larger decline in nonperforming loans (NPLs) amid a possible rise in dividend payouts, S&P Global Ratings said in a recent release.
In S&P's severe stress test involving the country's top nine banks, a rise in NPL ratios to 5% could lead to an earnings decline and a deterioration in capital buffers.
However, S&P expects the banks' common equity tier one ratio to remain healthy at over 12%, with earnings and capital to remain sufficient.
Two unrated midsized banks could see a pretax loss under this case due to tighter pre-provision earnings, limiting dividend payouts, the rating agency said.
Meanwhile, two banks with fixed dividend per share plans instead of a dividend ratio would need to reduce their payouts, S&P said.
A downside scenario involves higher NPLs from small businesses and lower-income borrowers, especially under a material change in subsidy structures, S&P said.
The country's banks could see higher payouts over the next two years due to solid profitability, healthy asset quality, and moderate growth, S&P credit analyst Nikita Anand said.
S&P expects the banks' robust capital and earnings to shield them against energy price shocks.