PETALING JAYA: The domestic banking sector is poised to show its resilience going into 2025.
Most analysts are maintaining their “positive” and “overweight” stance on the sector and projecting loan growth of 4.5% to 5.5% for next year.
They said this would be underpinned by sustained economic growth which would lead to a healthy loan growth and lower credit risks, as well as improved liquidity that would help sustain interest margins.
Economists expect Malaysia’s economic growth to hit 4% to 5% for next year, with a similar forecast for 2024.
Real gross domestic product (GDP) rose by 5.9% in the second quarter of 2024 (2Q24), up from 4.2% in 1Q24, underpinned by stronger private consumption and further recovery in exports amid a global tech upcycle.
Economic growth was further supported by greater capital formation activity from capital investments and construction works.
MARC Ratings Bhd chief executive officer Rajan Paramesran told StarBiz that loan growth for 2025 is anticipated to be at 4.5% to 5.5% from 5% for 2024.
He said this would be supported by the continued healthy growth of the country’s economy, translating into sustained demand for credit from both business and consumer sectors.
He said based on MARC Ratings projections, GDP growth for 2025 is expected to remain resilient at 4.4%, and the rating agency is maintaining its “stable “outlook on the banking sector.
For the first half of 2024 (1H24), consumer loans grew at an annualised 5.2%, slightly outpacing business loans growth of 4.8%.
MARC Ratings Bhd chief executive officer Rajan Paramesran
Delving into loans, Rajan said: “We note the recovery in business loans which began in late 2023 was largely sustained in 1H24. Potentially, the rollout of big-ticket public infrastructure projects and transition to renewable energy investments will spur financing over the next few years.
“Additionally, the anticipation of a stable overnight policy rate (OPR) would accommodate continued growth for the sector going into 2025,” he added.
Maybank Investment Bank banking analyst Desmond Ch’ng, who is maintaining a positive stance on the sector, said: “Against a GDP growth forecast of 5.2% for 2024 and 5.1% for 2025, we are maintaining the industry loan growth forecast of 5.5% for 2024.”
“This is slightly ahead of the 5.3% growth achieved in 2023, and introduce our industry loan growth forecast of 5.5% for 2025,” he said.
In 2025, he expects an aggregate core net profit growth of 6.1% for the sector, supported by fairly decent loan growth of 5.5%, net interest margin (NIM) expansion and marginally lower credit costs, mitigated in part by lower non-interest income.
NIM, a measure of profitability, is the spread bank earns between borrowing and lending. A wider NIM indicates higher earnings for banks.
Bank Negara had raised the OPR four times in 2022, and by 25 basis points (bps) each time – on May 11, July 6, Sept 8 and Nov 3. It raised rates by another 25 bps on May 3, 2023, leaving the OPR at 3%.
While higher interest rates will typically benefit banks’ margins in the short term, intense and irrational competition over the past year has effectively negated any positives.
Having bottomed out at an average of 2.04% in 4Q23, NIMs had sequentially improved over the past two quarters and improved four bps since to 2.08%.
This was after having compressed by a hefty 39 bps between 4Q22 and 4Q23. NIMs are expected to expand marginally by two bps next year.
CIMB Securities banking analyst Rachel Huang is forecasting loan growth at 6.1% for 2024 and 5.4% for 2025.
“Following our earlier revision in cost of fund assumptions from 2H24 onwards, we are now projecting NIM at 2.23% for 2024, upgraded by three bps from 2.20% previously.
“The NIM upgrade is a more significant eight bps (to 2.26% from 2.18%) due to the full-year impact in calendar year 2025,” said Huang, who is maintaining her “overweight” stance on the banking sector.
Rajan said there is a respite in the banks’ NIMs following significant compression in 2023 as the hike in the OPR and elevated deposits competition had led to a higher cost of funds for banks.
Moving forward, he expects margins to gradually recover as funding competition eases on the back of expectation of stable OPR.
Stronger trading and investment income on the back of improvements in the capital market could provide some upside to banks’ margins going forward, he pointed out.
In terms of asset quality, Rajan said the rating agency viewed the downtrend movement of the banking gross impaired loans (GIL) ratio at 1.6% as at end-June 2024 favourably, compared with 1.65% in 2023 and 1.72% in 2022.
He said the rollout of subsidy cuts, persistent inflationary pressures and the vulnerability of some business sectors could give rise to delinquencies.
“Nevertheless, we view the current loan loss coverage ratio of about 198% (including regulatory reserves) to be adequate for the banks to mitigate downside risk to its asset quality.
“We expect the GIL ratio to remain below the 2% levels in 2024 and 2025, backed by banks’ prudent underwriting,” Rajan added.
Separately, he said the key downside risk to the banking sector is largely dominated by external factors, namely the uncertain global economic environment amid rising concerns on geopolitical conflicts.
However, he said there has been no major contagion effect to the Malaysian banking sector.
“We draw comfort from the strong regulatory oversight and capitalisation buffers. MARC Ratings maintains a ‘stable’ outlook on the Malaysian banking sector given strong fundamentals that provide headroom to weather the macroeconomic headwinds,” he said.
