Local banks brace for lower loan growth this year on weak sentiments

Loan growth is expected to slow down to 4%-5% this year as uncertainty compresses demand, says an analyst

By MARK RAO / Pic By TMR

Malaysian banks are expected to experience slower loan growth this year between 4% and 5% on weaker consumer and business sentiments, while net interest margins (NIMs) are likely to compress local banks’ profitability.

Loan growth in the local banking industry improved to 5.6% last year from the 4.1% recorded in 2017 due to the gradual recovery in loan demand among corporates and households.

The growth is expected to slow down to 4%-5% this year as slower economic growth and uncertainty surrounding the current government’s long-term policy stance suppresses loan demand among businesses and households, said Moody’s Investors Service Inc.

Hong Leong Investment Bank Bhd senior analyst Chan Jit Hoong concurred that loan growth will mode-rate this year on weaker consumer and business sentiments.

He said within the consumer segment, the mortgage and auto loan segments are expected to see lower demand this year.

“Many consumers would have taken advantage of the tax-free period in 2018 to purchase cars and procure the necessary loans.

“We do not foresee demand for auto loans picking up after the tax break,” he told The Malaysian Reserve (TMR).

Chan said the property market also remains soft and will dampen demand for mortgages, while the prospects for business loans are not robust.

“Companies are mainly borrowing for working capital and not to expand or grow their business,” he said.

“At this juncture, given the overall slower macro-environment, there are no catalysts for business loans.”

An industry analyst said prospects are brighter for business loans compared to consumer or retail loans, as local businesses look to finance their daily operations, especially the small and medium enterprises (SMEs).

“We expect business loan growth to pick up as early as the first quarter of this year, and will mostly be supported by the SME segment, which banks are increasing their exposure to,” the analyst, who wanted to remain anonymous, told TMR.

“SMEs need financing, not for big-ticket investments, but for working capital to run their day-to-day operations.”

The banking sector was in the bright spot in corporate Malaysia, in what was seen as a dismal end to 2018 for the private sector as a whole.

Malayan Banking Bhd (Maybank), CIMB Group Holdings Bhd and RHB Bank Bhd posted record net profits at RM8.11 billion, RM5.58 billion and RM2.31 billion respectively for the 2018 financial year.

Other top banks in the country also posted improved earnings year-on-year, either on an individual quarter basis or over a cumulative period.

However, banks warned of NIM compression in 2019 amid higher competition for deposits. Maybank, CIMB and Hong Leong Bank Bhd all noted NIM pressure for their respective financial periods.

“We foresee NIMs compressing further by about five basis points this year (which will weigh on banks’ earnings),” the banking analyst said.

“Asset quality is also at risk from developments in the macro-economy, but Malaysian banks have built strong buffers, so capital risks are not a concern at this juncture.”

Meanwhile, Chan said Malaysian banks’ two-year earnings compound annual growth rate is estimated at 4.1%, lower than consensus’ 5.5% estimate, but closer to the five-year historical 4.4% level, in view of the lower projected loan growth and NIM compression in 2019.

The views are aligned with Moody’s latest forecast of profitability declining for Malaysian banks on slower revenue growth and rising credit costs.

“In 2019, revenue growth will weaken as loan growth moderates due to weaker demand, and as NIMs contract due to stiff deposit competition ahead of the implementation of net stable funding ratio requirements at the start of 2020,” it said.

The rating agency added that credit costs will rise marginally on growing asset risks from worsening macroeconomic conditions.

“Asset risks will grow in 2019 as business conditions deteriorate for the export-oriented sectors, although strong loan-loss absorption buffers will mitigate the increased risk.”

This is evident in common equity tier 1 improving industry-wide in 2018 due to sufficient internal generation to cover loan growth, and in several initiatives that were undertaken to optimise risk-weighted assets and dividend reinvestment schemes, Moody’s said.