Loan growth picks up amid attractive low interest rates

Wariness over Covid-19 and the RMCO’s extension to year-end could put the brakes on credit growth and economic recovery


THE low interest-rate environment is attracting borrowers’ interest. Loan growth accelerated to a 14-month high in July at 4.5% (June: 4.1%), driven by higher growth in loans for the purchase of residential (7.4%) and non-residential properties (2.3%), according to Bank Negara Malaysia’s (BNM) recent statistics.

Kenanga Investment Bank Bhd (Kenanga Research) noted that loans for personal use rose to a 16-month high at 5.2% (June: 4.4%), likely for emergency expenses.

“By sector, growth was propelled by a steady increase in credit growth for the household sector (4.3%) and finance, insurance and business activities (7.1%), reflecting promising signs of economic recovery.

“Loan growth moderated to 0.3% month-on-month (MoM) (June: 0.6%), despite a new record low for the weighted average lending rate of commercial banks at 3.7%,” Kenanga Research said in a recent report.

Deposit growth inched up to a 11-month high at 4.5% (June: 4.4%), helped by improved growth in demand deposits (16.3%), saving deposits (22.6%) and repurchase agreement (27.2%) partly attributable to the bullish stock market activities in the past few months.

Kenanga Research kept its loan growth forecast at between 1% and 2% for this year (2019: 3.9%), in the wake of uncertainties wrought by the Covid-19 pandemic.

At this moment, it’s uncertain whether the current loan growth can be sustained as fears of a protracted unemployment trend and business bankruptcies post-Covid-19 continue to linger, it added.

In addition, wariness over Covid-19 and the extension of the Recovery Movement Control Order (RMCO) to year-end could put the brakes on credit growth and economic recovery.

“We believe there is still ample room for another Overnight Policy Rate (OPR) cut if need be, to support the economy.

“Nevertheless, we see a higher probability of BNM keeping the OPR unchanged at the next Monetary Policy Committee (MPC) meeting next Thursday,” the research firm said.

BNM’s monthly highlights for July 2020 revealed that net financing growth increased to 4% in July from 3.7% in June, supported by outstanding corporate bonds (2.9%) and loans (4.5%).

Household loan growth rose to 4.3% (June: 3.5%), with a further increase in housing and car loan disbursements reflecting the positive impact of policy measures.

Outstanding business loan growth moderated to 3.9% (June: 4.2%) as repayments continued to increase.

Capital ratios rose slightly in July due to recognition of interim profits for the first half of 2020.

As of July this year, the banking system had surplus capital buffers of RM118.1 billion.

According to the central bank, headline inflation was less negative at -1.3% in July mainly due to higher domestic retail fuel prices during the month.

“Underlying inflation, as measured by core inflation, moderated slightly to 1.1% (June: 1.2%).

“Nevertheless, the risk of deflation remains contained. A higher share of Consumer Price Index items recorded MoM price increases in July at 46%,” it explained.

Total sales of passenger cars recorded a higher growth of 12.8% in July 2020 (June: 6.3%), boosted by the sales tax exemption and car dealers’ promotional campaigns.

This was the second consecutive month of positive year-on-year growth since the beginning of the MCO in March.

MIDF Amanah Investment Bank Bhd (MIDF Research) said with the short-term National Economic Recovery Plan, retail loans grew 5.1% to RM924.5 billion in July, compared to 4.4% to RM914 billion the prior month.

Business loans expanded at a slower pace of 3.2% to RM796.4 billion (June: 3.3% to RM799.4 billion).

“We opine this could be due to prevailing cautious sentiment in businesses due to the lack of long-term visibility of business conditions,” MIDF Research said in a note.

Despite increased loan applications over the past two months, loan approvals continue to decline since March, albeit at a lower rate.

Loan approvals fell 14.7% in July, but approvals for auto loans grew 40.5% to RM5.3 billion. Mortgage approvals fell 18% to RM9.1 billion (June: -35.1%).

MIDF Research believed that although there was some recovery in loan demand, banks remain cautious given the uncertainty once the blanket loan moratorium ends on Sept 30.

Total system deposits remain stable with 4.2% growth as of July.

Current account and savings account expanded 18.4%, while fixed deposits contracted for the fifth consecutive month at -1.5% to RM984.1 billion.

“We believe that this was due to the low fixed deposits rates following the OPR cuts which may be unattractive for savers, with better alternatives for higher returns.

“We also opine that depositors may be reluctant to tie-up their cashflows and the desire to maintain liquidity given the uncertain conditions as a result of Covid-19. We expect that this will moderate the net interest margin compression for banks this year,” the research firm said.

MIDF Research is staying ‘Neutral’ on the banking sector as it expects the economy to take a hit from the various forms of the MCO.

“This will have an impact on loan growth and asset quality. There seem to be improvements such as faster pace loans growth and loans applications.

“However, we foresee that it will take some time for the situation to return to normal. Also, we are concerned about the potential impact the ending of the loan moratorium will have on asset quality,” it said.