Strong fundamentals ensure growth, resilience of banks in Malaysia

KUALA LUMPUR – Malaysian banks have continued to deliver a resilient performance in 2023, anchored by the banking system’s strong fundamentals despite external headwinds and heightened downside risks to growth.

Most analysts are forecasting the banking system’s loan growth — an economic bellwether — to be around four per cent for this year compared with 5.7 per cent in 2022 in tandem with the Gross Domestic Product growth, which is expected to be about 4 to 5 per cent in 2023.

Key growth drivers for the sector for the remainder of the year and in 2024 include strong domestic demand, an uptick in employment rates, and wage growth.

Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid is of the view that Malaysian banks are well capitalised with Common Equity Tier 1 (CET1) ratio, Tier 1 ratio and total capital ratio at 14.5 per cent, 15.0 per cent and 18.1 per cent, respectively, as of September 2023. These are above the minimum levels of 4.5 per cent, 6.0 per cent and 8.0 per cent, respectively.

Banks are also highly liquid with a liquidity coverage ratio of 151.5 per cent, which is above the minimum level of 100 per cent, he noted.

“However, a higher cost of funds amidst intense competition in the lending markets has resulted in net income margin (NIM) compression.

“There also seemed to be an uptick in the gross impaired ratio from 1.73 per cent in January 2023 to 1.80 per cent in May 2023, but thereafter, it moderated to 1.72 per cent in September 2023.

“All in all, banks are generally stable this year despite the challenging operating environment,” he told Bernama.

OPR: Monetary policy stance remains supportive of economy

The simultaneous supply and demand shocks caused by the Covid-19 pandemic outbreak in 2020 resulted in Bank Negara Malaysia (BNM) slashing the Overnight Policy Rate (OPR) to a record low of 1.75 per cent in July 2020 to boost the country’s economy.

However, the central bank had to increase the OPR again last year to reduce credit growth and inflation as inflation rates and interest rates are intrinsically linked.

In May 2022 BNM started to increase the OPR continuously and brought OPR rates back to the pre-Covid-19 level of 3.00 per cent in May 2023. It is expected to keep it on hold for the rest of the year, supported by the stable domestic inflation and growth outlook.

RAM Rating Services Bhd said an OPR hike usually will benefit banks’ NIM as the majority of the domestic banking industry’s loans are floating-rate facilities, which will reprice faster than deposits.

“The extent of the NIM uplift, however, will be partly moderated by keener deposit competition as well as continued contraction in current and savings account (CASA) growth.

“Overall bank NIMs will likely see some narrowing in 2023. This is given the full-year effect of deposit upward repricing from the four OPR increases last year.

“The higher borrowing costs may also affect the repayment capabilities of certain weak borrowers although RAM expects the asset quality of banks to remain intact,” it said.

Industry loan growth boosted by household, non-household loans

According to Fitch Ratings, Malaysian banks continue to benefit from a supportive home market that provides steady growth opportunities against manageable credit risks. This is expected to drive their financial performance well into 2024.

Industry loan growth saw a modest increase to 4.3 per cent year-on-year (y-o-y) in September 2023, supported by higher growth in household and non-household loans, it said.

The rating agency said the asset-quality performance of household-sector loans, which account for nearly 60 per cent of total system lending, was supported by a healthy job market.

However, it noted that business loans stay muted as businesses remain cautious on their spending plans in view of the slower global outlook and slowing economic activity.

MIDF Research banking analyst Woo Choong Yi commented that loan growth for the first half of 2023 was a lot weaker than last year’s as corporates and small and medium enterprises (SMEs) were waiting for state election results in August 2023.

“We saw loan applications and approvals shoot up after the election with the consumer segment providing a very consistent growth throughout the year due to delayed drawdowns in mortgages and hire purchases, but SME growth was a bit mixed in line with a weaker corporate growth,” he said.

 Islamic banks outpace conventional peers

According to Moody’s Investors Service, the growth of Islamic banks in Malaysia has outpaced its conventional peers, with penetration growing tremendously over the past 10 to 15 years and now making up around 40 per cent of the total financing in Malaysia.

It was noted that the penetration rate stood around 20 per cent 10 to 15 years ago.

“Islamic banking growth in Malaysia is mainly driven by government policies as well as the ‘Islamic First’ strategy employed by the banks, which essentially means prioritising Islamic banks and Islamic products, Moody’s said.

 Passing on the leadership baton

In 2023, Malaysia saw the appointment of Datuk Abdul Rasheed Abdul Ghaffour as governor for a five-year term from July 1, 2023, to June 30, 2028.

He took over the position of governor from Tan Sri Nor Shamsiah Mohd Yunus, who completed her five-year term on June 30, 2023.

Abdul Rasheed joined the central bank in 1988, rising to the position of deputy governor in 2016, and he is currently a member of the Monetary Policy Committee and Financial Stability Committee, a position he has held since 2015.

He also played key roles in the development and implementation of the Financial Sector Masterplan and Financial Sector Blueprints.

Apart from that, the banking sector also saw the appointment of Dafinah Ahmed Hilmi as Hong Leong Islamic Bank Bhd chief executive officer (CEO) and Jamie Ling as AMMB Holdings Bhd group CEO and AmBank (M) Bhd CEO, as well as Kevin Lam Sai Yoke as Hong Leong Bank Bhd group managing director and CEO.

Banking sector outlook for 2024

The BNM governor has expressed confidence that the Malaysian economy will expand by 4.0 per cent this year and 4.0-5.0 per cent next year after reviewing the strong indicators of the economy.

Analysts have said the Malaysian banking sector is also expected to see an improvement in loan growth of between 4.0 and 5.0 per cent in 2024, with consumer loans outpacing business loans amid external uncertainties.

Abdul Rasheed said the sector’s prospects for 2024 would largely depend on several factors.

“These include the overall economic environment, external demand and how well the banks adapt to potential economic challenges due to the spillover effects from a possible slowdown of the global economy.

“Besides this, the possibility of a major recession in China as a result of the financial distress suffered by the country’s property sector would also have an impact on the local banking sector,” he added. – BERNAMA / pic TMR FILE