OCBC Bank (M) Bhd head of strategy and transformation Saw Poh Hoon
PETALING JAYA: Malaysia’s banking sector is poised to come under pressure this year which could impact the sector’s liquidity and credit demand, experts say.
They noted that President-elect Donald Trump’s protectionist policies could affect the banking sector as the country’s trade and economy would be impacted which in turn would affect banks’ businesses.
OCBC Bank (M) Bhd head of strategy and transformation Saw Poh Hoon told StarBiz the economic outlook is muddier compared to 2024, particularly in relation to the timing and countries that United States protectionist policies could target.
“We assess the Malaysian economy to be susceptible to downside risks, especially if tariffs are imposed on the country’s exports to the United States.
“While we have argued that Malaysia has a well-diversified export base in terms of trading partners and products, direct 10% tariffs by the United States on all its trading partners, including Malaysia, could shave off up to 0.9 percentage point off our baseline for Malaysia’s growth while 20% tariffs by the United States on all its trading partners could shave off 1.5 percentage points from our baseline for Malaysia’s growth,” she said.
Saw said this could in turn have an impact on credit growth. The banking sector would come under some pressure, however, as in the past crises, the sector is resilient enough and has adequate buffers to mitigate some downside risks, she added.
UCSI University Malaysia associate professor in finance Liew Chee Yoong
Concurring with Saw, UCSI University Malaysia associate professor in finance Liew Chee Yoong said compared to 2024, the banking sector is likely to encounter heightened challenges.
Globally, he said the potential resurgence of protectionist policies under Trump’s presidency in the United States could disrupt trade flows, impacting Malaysia’s export-driven economy.
Such disruptions may reduce liquidity and credit demand, indirectly affecting the banking sector, he noted.
Additionally, he said the persistence of high global interest rates, particularly in the United States, could lead to capital outflows, exchange rate volatility and increased funding costs for Malaysian banks.
“China’s economic performance will also be a critical factor. Given Malaysia’s strong trade ties with China, a slower-than-expected recovery in the Chinese economy could also hurt trade volumes and reduce foreign direct investments.
“Domestically, political uncertainties and fiscal tightening measures, such as subsidy reforms, may further weigh on consumer and business confidence.
“Moreover, the increasing presence of digital banks and fintech players will push traditional banks to innovate and defend their market share,” Liew, who is also a research fellow at the Centre for Market Education, noted.
RAM Ratings co-head of financial institution ratings Wong Yin Ching
RAM Rating Services Bhd’s co-head of financial institution ratings Wong Yin Ching said heightened geopolitical conflicts, including Trump’s proposed import tariff policy may present some downside risks to the economic and loan growth outlook.
The upcoming RON95 subsidy rationalisation in the second half of the year could also dampen consumer credit demand, she said, although the impact is anticipated to be mitigated by targeted government subsidies and financial assistance for households and businesses.
On the whole, Wong said the rating agency expects the domestic banking system to remain resilient in 2025.
“During the first eleven months of 2024, loans grew an annualised 5.1% against 5.3% in 2023 in line with our full-year projection.
“For 2025, we forecast loans to expand by 5%, supported by RAM’s real gross domestic product growth expectation of 4% to 5% compared with our 2024 forecast growth of 5.1%.
“Key anchors include strong domestic labour market conditions, sustained demand for electrical and electronics exports and accelerated implementation of investment projects,” she said.
Wong said Malaysian banks’ robust asset quality continues to underpin their strong credit fundamentals.
The system’s gross impaired loan ratio improved to 1.51% as at end-November 2024 (end-December 2023: 1.65%). The metric would likely outperform RAM’s initial estimate of 1.6% to 1.7% by end-2024, she said, adding that RAM envisages banks’ asset quality to stay intact in 2025.
“Banks are expected to report a steady improvement in their bottom lines this year, driven by benign loan provisioning expenses and predominantly stable net interest margins (NIMs).
“The margin outlook is premised on our view that the overnight policy rate will remain unchanged and our observation that deposit competition has already normalised. However, banks may not replicate the exceptional trading and investment income performance observed previously,” Wong said.
On the growth drivers for the local banking sector for this year, OCBC’s Saw sees the local banking scene being supported primarily by the household sector, while demand for business loans would be driven by small and medium enterprises (SMEs).
“We anticipate loan growth will align with industry, primarily driven by an increase in business loans. This growth will leverage our strengths in the wholesale segments as we concentrate on supporting customers in key market centres and targeted sectors, including green initiatives, sustainability, healthcare, and advanced manufacturing,” she said.
Saw expects NIM to remain stable as banks continue to manage their deposits and funding costs in response to the anticipated moderation in credit growth, coupled with intense competition.
Liew said despite these challenges, several growth drivers could bolster the sector’s performance. Malaysia’s economic resilience, supported by strong domestic demand and government infrastructure projects, would be a significant factor,” he said.
Additionally, he said the rising prominence of green financing presents opportunities for banks to expand their loan portfolios.
Liew said demand for funding in renewable energy projects, electric vehicles and other sustainable initiatives is expected to grow as environmental, social and governance considerations take centre stage.
“Digital transformation is another key driver. Banks investing in technology will benefit from operational efficiencies, enhanced customer experience, and the ability to attract tech-savvy consumers.
“Furthermore, Malaysia’s leadership in Islamic finance positions it well to capture opportunities both domestically and in regional markets. Finally, regional trade recovery, particularly within Asean, offers promising avenues for growth in trade finance and cross-border services,” he said.
Liew expects loan growth in 2025 to be slightly lower or at par with 2024, reflecting a cautious lending environment amid external uncertainties.
Among loan types, business loans are likely to grow faster than consumer loans, he noted. He said demand for financing from SMEs and corporations, particularly in sectors like infrastructure development, renewable energy and digitalisation, is expected to drive this growth.
“Conversely, consumer loan growth will be more subdued, constrained by cautious consumer sentiment and elevated borrowing costs.
“However, certain consumer loan segments, such as mortgages and vehicle financing, may see steady demand.
“Rising property development and vehicle ownership aspirations among the middle class could sustain growth in these areas, although household caution in discretionary spending might temper overall consumer loan growth,” Liew said.
Meanwhile, CGS International Research said for this year, it projects loan growth of around 5% (between 4.5% and 5.5%), which is slightly below the expected expansion of 5.3% to 5.4% in 2024.
Kenanga Research added it expects to see fewer negative surprises to fundamentals with previously distortive provisions and writebacks from pandemic overlays out of the picture.
One positive development would be the upcoming signing of the definitive agreement for the Johor-Singapore Special Economic Zone, which would bolster domestic industries and foreign direct investment injections in that area.
“Pending global developments that will steer our economic trajectory, we see banks deploying varying strategies to enforce operational resiliency and sustain earnings.
“Going into 2025, we project for industry loan growth to come in at 6% and the overnight policy rate to be steady at 3%.”
The research firm foresees households further loading in mortgages and hire purchases from an early Chinese New Year and Hari Raya season in the first quarter of financial year 2025, while business loans will be driven by reinvigorated service sectors and working capital needs.
