PETALING JAYA: The banking sector is anticipated to come under pressure and post slower loan growth this year amid weaker spending underpinned, among others, by the government’s fuel subsidy rationalisation policy.
RAM Rating Services Bhd co-head of financial institution ratings Sophia Lee told StarBiz she expects slower loan growth of 5% this year from 5.3% in 2023.
She foresees retail loans to likely moderate as credit demand may be dampened by possible squeeze on consumer disposable incomes and weaker spending sentiment, given the government’s re-targeting of subsidies.
Analysts generally expect the fuel subsidy rationalisation to spiral into higher cost of living from rising prices and would, in turn, affect consumer spending and slow loan growth.
However, she said loan growth would likely be driven by business loans as exports and global trade rebound.
“Recent exports data is already showing promising signs of reversal, with the first quarter of 2024 (1Q24) exports up 2.2% year-on-year (y-o-y) after three prior consecutive quarterly declines (2023: 8% contraction y-o-y),” she said.
On the whole, she said RAM Rating is maintaining a “stable” outlook for the domestic banking sector for 2024.
Notwithstanding some lingering uncertainties over global economic conditions and cost of living pressures from the rollout of targeted fuel subsidies in the second half of 2024, Lee expects banks to sustain their credit profiles this year.
RAM Rating Services Bhd co-head of financial institution ratings Sophia LeeUnder the fuel subsidy rationalisation policy, the targeted diesel subsidy took effect on June 10 that saw the retail price of diesel in Peninsular Malaysia at RM3.35 per litre.
For those in Sabah, Sarawak and Labuan, the price remains at the subsidised rate of RM2.15 per litre.
At the moment, the government has not set a timeframe on the timeline for targeted subsidy implementation for RON95 petrol.
Kenanga Research said market-wide, most banks are guiding conservatively on a possible easing in loan growth numbers.
Going forward, Kenanga Research said the outlook for the sector in 2024 has more caution than optimism.
It noted that most banks have seen previous net interest margin (NIM) pressure to be subsiding as the market is rationalising their cost of funds but on the flipside, greater prudence is ascribed against potential US Federal Reserve rate cuts in addition to the introduction of targeted fuel subsidies and prolonged weakness in the ringgit, which could spur inflation.
NIM, a measure of profitability, is the spread bank earns between borrowing and lending. A wider NIM indicates higher earnings for banks.
“This led the banks to anticipate a slower second half in 2024 and potential softening of investment markets. However, this could be counterbalanced by greater funding needs by infrastructure projects and the rejuvenation of exporters that benefit from a weak ringgit,” it noted.
In terms of profitability, RAM Rating’s Lee sees limited upside to profit outperformance this year as lower provisioning charges could be offset by a more moderate loan growth.
NIM, which were significantly compressed in 2023 as multiple rate hikes and heightened deposit competition drove up banks’ cost of funds, have stabilised this year following less intense deposit competition.
“Nonetheless, we expect NIMs to be flat this year. New dynamics in the banking sector brought on by three domestic digital banks that became operational are worth a close watch.
“However, we do not anticipate them to pose any threat to incumbent banks. The aggregate size of the five newly licensed digital banks remains small,” she added.
Meanwhile, Desmond Ch’ng who is a banking analyst with Maybank Investment Bank, said: “Our aggregate 2024 operating profit growth forecast is raised to 7.6% from 6.3% before, on faster domestic loan growth of 5.5% from 5.1% previously.
“We have raised our projected core net profit growth to 6.8% from 5.5%, driven by faster operating profit growth, mitigated in part by a higher credit cost average of 24 basis points (bps) versus 23 bps in 2023.
“Into 2025, we project operating profit growth of 5.5% and core net profit growth of 6.1%.”
Ch’ng expects return on equity (ROE) for banks to average 10.3% in 2024 and 10.4% in 2025.
“Dividend yields are attractive, with most banks offering yields of more than 5%, except for Hong Leong Bank Bhd
and Public Bank Bhd. Bank Islam Malaysia Bhd (BIMB), Malayan Banking Bhd and RHB Bank Bhd potentially offering yields of 7% or more for financial year 2024,” he noted.
ROE is a gauge of a corporation’s profitability and how efficiently it generates those profits. The higher the ROE, the better a company is at converting its equity financing into profits.
Lee said asset quality is anticipated to remain healthy.
Favourable labour market conditions, with the unemployment rate recovering to the pre-Covid-19 pandemic level of 3.3%, should help contain the adverse impact from the rollout of subsidy rationalisation, he said.
“We do not expect the industry’s gross impaired loan (GIL) ratio for end-2024 to change too much from the 1.62% as at end-March 2024. Our projection is for the ratio to hover between 1.6% and 1.7%.
“While there could be potential weaknesses in the commercial real estate, construction, wholesale and retail trade sectors and lower-income households, banks’ prudent underwriting and write-offs against excess provisions should keep the GIL ratio in check,” she said.
Considering that loan impairments would be largely contained and factoring in sizeable management overlays still retained by banks, Lee foresees credit cost ratio to ease further to around 20 bps (2023 and 1Q24 ratio of eight selected banks was 23 bps and 22 bps, respectively).
Furthermore, she said banks’ loan loss coverage ratio remained solid at 134% (with regulatory reserves) as at end-March 2024.
“Some writebacks of these overlays are anticipated but banks are prudently assessing the quantum and timing of reversals in view of the macro headwinds.
“The system’s capitalisation remains robust, with the industry’s common equity tier-1 capital ratio at a sturdy 14.6% on the same date,” Lee noted.
