PETALING JAYA: The prospects of the local banking sector remain largely stable with credit demand expected to improve and deterioration in asset quality staying manageable.
For one, S&P Global Ratings anticipates that credit growth will improve to 6% in 2025, thanks to higher economic growth and an increase in corporate demand led by key infrastructure projects.
“Our estimates put Malaysia’s gross domestic product (GDP) growth at 4.8% in 2025. In our base case, we forecast policy rates to decline to 2.75% in 2025, from the existing 3%,” the firm said in its “Global Banks Country-by-Country Outlook 2025” report yesterday.
Bank Muamalat Malaysia Bhd head of economics, market analysis and social finance Mohd Afzanizam Abdul Rashid has a lower bank loan growth target of 5% to 5.5% for 2025, after what he said was a “respectable” growth rate in 2024.
“A high base in 2024 would influence the year-on-year (y-o-y) expansion. Having said that, it is still a decent growth with the impairment ratio remaining stable underpinned by robust and stringent risk management practices among the banks,” he told StarBiz.
Domestic loan growth had sustained its momentum at 7% y-o-y in the second quarter of 2024 (2Q24). The sector also posted a cumulative core net profit increase of 9% y-o-y for the first half of the year, with it being reported that this was driven by a 7% growth in operating profit and stable credit costs.
On the whole, Tradeview Capital chief executive officer and founder Ng Zhu Hann said the domestic banking sector is expected to continue to see further growth, looking at GDP growth momentum and the property market which is recovering from its doldrums and have in fact been vibrant.
“There are catalysts for the economy and the banking sector to do better next year.
“More growth can be expected from housing loans. In terms of automotive, it is a competitive landscape due to electric vehicles whereby some banks are offering green loans and financing as well.
“At the same time, automotive vendors are giving out subsidised loans. Hence the loan growth of the automotive sector may see some decline,” he said.
Ng added the allocation of RM20bil and RM10bil for the Syarikat Jaminan Pembiayaan Perniagaan (SJPP) financing and Housing Credit Guarantee Scheme (SJKP) respectively will spur loans growth among individuals and businesses.
Rakuten Trade head of equity sales Vincent Lau also said continued growth in bank earnings is supported by the stable overnight policy rate and controlled non-performing loan rate, which indicates that banks remain open to lending and credit management is still under control.
“New car launches and a favourable environment for electric vehicles contribute to loan demand, and asset quality should be stable.
“While some anticipate cost pressures from fuel subsidy rationalisation could strain low-income households and SMEs, government salary hikes and targeted subsidies for essentials should mitigate these risks. The majority of the population remains eligible for fuel subsidies, and price controls have maintained stability,” he said.
In terms of asset quality, S&P Global Ratings said deterioration would be “manageable”. The company flagged a higher non-performing loan (NPL) ratio for the industry increasing by 20 to 25 basis points (bps) by the end of 2025 from 1.6% as of the end of June this year.
“This could come from restructured loans, especially to low-income households and small to mid-sized enterprises. Any further rollbacks in fuel subsidies would have further impact on these two vulnerable groups,” it said.
Nonetheless, the rating agency also noted the level of restructured loans has diminished steadily and stood at about 2% at end-June 2024, while projecting that credit costs should stay at 15 to 20 bps, similar to the pre-lockdown average.
“Cost pressures stemming from fuel subsidy rationalisation could increase financial strain for low-income households and small to mid-sized enterprises. However, this is not our base case, because we think vulnerable segments would get financial assistance,” S&P Global Ratings said.
Mohd Afzanizam, on the other hand, does not expect banks to face higher asset quality pressures and credit stress going forward, given that the financial institutions have been “extremely careful” in their credit underwriting standard and are regularly checked and audited by Bank Negara and external auditors.
“Banks will constantly take into consideration the changing dynamics in the macroeconomic variable (MEV) and will be reflected in their stress testing on capital and the expected credit loss (ECL). Since it is highly institutionalised, risks of a sudden rise in impairment looks fairly contained,” he stated.
MEV refers to economic factors like interest rates and unemployment that can impact a bank’s performance, while the ECL is the estimated amount a bank may lose from loans that might not be repaid, based on these economic conditions.
At the same time, Tradeview’s Ng also said it is still too early to say if the subsidy rationalisation initiative for RON95 will carry through next year as the details have yet to be finalised.
“Looking at the diesel subsidy rationalisation measure, many companies that require fleet cards have already received them. As such, there is actually no such risk that the default rate will increase suddenly,” he said.
What remains as a sore spot for the domestic banking landscape, however, is the intense competition for both loans and deposits, which may continue to put pressure on banks’ net interest margins (NIM).
To this end, S&P Global Ratings is anticipating a decline of three to five basis points (bps) in the NIM of Malaysian banks.
“Over the next two years, we forecast return on assets to stay at 1.2% to 1.3%. Upside potential to profitability could come from lower credit costs if large banks choose to write back pandemic-related provisions,” the firm said.
In this regard, Mohd Afzanizam said the main issue for banks is the competition in the deposit markets which results in higher cost of funds and affects the NIM.
“Funding mix strategy is key as the banks would need to balance its regulatory requirement for liquidity while at the same time be able to procure low cost deposits such as current account savings account especially from the retail segment,” he said.
S&P Global Ratings highlighted household leverage and labour market conditions as well as property market disruptions as the factors to watch out for over the next year in the banking space.
The firm noted that Malaysian banks’ asset quality is closely correlated to employment levels, given a large share of household loans.
“High household leverage poses some risk, in our opinion. However, stable employment and adequate household financial assets are mitigating factors,” it said.
Ng however is not overly worried, opining while that high household leverage against GDP has always been a concern in Malaysia, the country’s household debt levels are still manageable compared with other developing countries.
“As a developing economy, you want to promote home ownership. Debts incurred for house purchases or properties are considered good debts,” he said.
It is notable that banks have material exposure to real estate development and construction, at about 8% of total loans. Hence, oversupply in the commercial real estate market and elevated office vacancy rates remain as structural challenges, S&P Global Ratings stated.
“Commercial and office properties will always remain weak. However, the property market is supported by the industrial segment and data centres. Moreover, the residential market remains quite buoyant.
“Housing assets or real estate assets are collateral-based lending. In a way, the financing aspect is taken care of in terms of the risks compared to say personal loan, credit cards, or depreciating assets like automotive. Real estate generally is quite, in my view, a stable asset class,” Ng said.
