Loans growth to remain low in the near term, but projects revival could add spark

Loans for construction and WC purposes are expected to see a revival following the govt’s decision to kick-start a few mega infrastructure projects


Loan growth, which has posted slower rate, is expected to remain muted in the near term, simmered with worries over economic downside although signs of selected sectors showed some glimpse of hope.

Loans application for construction and working capital (WC) purposes are expected to see a revival following the government’s decision to kick-start a few mega infrastructure projects.

Bank Negara Malaysia’s (BNM) recent banking data showed loan growth slowed to 4.9% year-on-year (YoY) in March this year to RM1.68 billion, versus 5% YoY growth in February.

Business loans slipped to 4.1% (February: 4.3%) while household loan growth was at 5.3% (February: 5.2%).

Loans applied fell by 6% in March 2019 with auto, WC and non-residential loans posting muted growth. However, loan approvals rose 6.3%, boosted by the residential mortgages and auto loans after falling 6.7% in February.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said while lending activities should see growth this year, the momentum will continue to be guarded as economic growth prospects have been very challenging.

“This would inadvertently result in a cautious stance among financial institutions. Subsequently, banks will be very vigilant in their underwriting standards in order to contain possible deterioration in asset quality.

Mohd Afzanizam says while lending activities should see growth this year, the momentum will continue to be guarded as economic growth prospects have been very challenging (Pic: TMRpic)

“Already, we have seen pockets of higher impairment ratio such as in purchases of non-residential properties and purchases of fixed assets other than land and buildings, which have gone up to 1.39% and 2.79% as of March 2019 compared to 1.25% and 2.16% a year ago respectively,” he told The Malaysian Reserve recently.

Loans applied for purchase of residential property stood at RM21.72 million in March 2019, up 52.7% from RM14.22 million in February and up 10.1% from RM19.72 million in January. On a YoY basis, loans applied in March 2019 were higher by 5.5% from RM20.59 million in March last year.

Loans applied for purchase of passenger cars came in at RM5.62 million in March 2019, 21.6% higher than RM4.62 million in February, 16.9% lower than RM6.76 million in January and 24% weaker than RM7.39 million from a year ago.

Loans applied for construction purposes more than doubled to RM3.3 million in March this year versus RM1.53 million the month before, likely due to good news in the construction space and the shorter working month in February, although the figure was lower by 5.7% and 18.9% than RM3.5 million in January 2019 and RM4.07 million in March 2018 respectively.

WC loans applied stood at RM16.16 million in March 2019, a 59.2% jump from RM10.15 million in February and 30% higher than RM12.43 million in January, while 1.2% lower than RM16.35 million last year.

“The revival of infrastructure projects such as the East Coast Rail Link would certainly be good for the economy as it will spur economic activity. In this regard, banks will assess the viability of contractors involved in the projects, especially in areas relating to their gearing level and cashflow,” Mohd Afzanizam said.

Meanwhile, loans approved for purchase of residential property jumped to RM8.64 million in March this year, up 44.2% from RM5.99 million in February and 6.9% stronger than RM8.08 million in January. YoY, loans approved in this category were 1.9% higher than RM8.48 million previously.

Loans approved for purchase of non-residential property surged as well at RM4.44 million in March 2019, more than double the RM2.14 million in the previous month, 78.3% higher than RM2.49 million in January and 65.1% more than RM2.69 million a year ago.

UOB Kay Hian Securities (M) Sdn Bhd in a note last week said new loan applications fell 6% YoY in March, while loan approvals grew 6.3% YoY in the same month.

Business loan applications declined 8.5% in March after dropping 7.9% in January and 20.5% in February, making six consecutive months of YoY contraction in new loan applications by businesses.

“As the overall consumer and small and medium enterprises sentiment is likely to remain subdued for most of 2019, we believe the market will initially favour banks with strong corporate loans by pricing in stronger loan growth for such banks (CIMB Group Holdings Bhd, Malayan Banking Bhd and RHB Bank Bhd) in 2019 on the back of the revival of a number of mega infrastructure projects,” it said.

Kenanga Investment Bank Bhd in a separate report said tepid loan applications appear to be bottoming ahead as approvals rebound, indicating an upturn ahead in credit demand.

“Despite the positive newsflow recently, we maintain our ‘Neutral’ call for the sector as external uncertainties prevail, with no visible catalyst or potential game changer ahead. Our view of moderate loans growth still holds. Still, valuations are attractive with most banks under our coverage rated at ‘Outperform’,” it said.

CIMB Investment Bank Bhd also maintained its ‘Neutral’ rating on domestic banks amid margin compression concerns and expectations for higher credit costs.

“Given the rebound in growth of the industry’s loan approvals in March 2019, we expect loan growth to recover in the second quarter of 2019, following the downtrend over the past four months.

“However, we think that this may not be sustainable as loan applications in March 2019 remained weak. We stick to our projected loan growth of circa 5% for 2019,” it said.

Hong Leong Investment Bank Bhd, which kept its ‘Neutral’ recommendation on the banking sector, said the sector is still lacking growth catalysts, while risks stem from a potential Overnight Policy Rate cut and muted capital market activities.

“Overall, positive leads were still missing and hence, we find it difficult to be bullish on the sector. System loans growth slowed down to 4.9% YoY (below expectations), while deposits tapered as well (+5.3%). That said, current account and savings account picked up momentum (+2.6%), but overall funding cost continues to be expensive and net interest margin outlook is still challenging,” it added.