Banking sector set to see weaker loan growth
Slower economy, fintech expected to weigh on banks’ profitability
PETALING JAYA: Malaysian banks are expected to see weaker loan growth this year amid an operating environment which continues to be challenging.
Bank Negara, in its financial stability review report for the first half of 2019, pointed to slower economic growth and fintech developments as among factors that will have a bearing on banks’ profitability.
The central bank’s views, according to CIMB Research, substantiates its expectation of weaker loan growth in 2019.
“We are projecting loan growth of circa 5% in 2019 versus 5.6% in 2018.
“Given that the industry’s total loan growth in the seven-month period was only 1.4%, we see downside risks to our projected full-year loan growth of circa 5%,” the research house said in a report following a briefing hosted by Bank Negara in conjunction with the release of the report on late Wednesday evening.
The research firm, which is keeping its neutral rating on the sector, expects an increase in loan loss provisioning in line with the rise in the industry’s gross impaired loan ratio.
The central bank in its review had noted that the impairment ratio for banks and non-bank financial institutions rose from 1.2% in 2018 to 1.3% in 1H19.
This was still below the sector’s 5-year average of 1.5%.
The positive development was that the sector’s exposure to the vulnerable segment - borrowers with weak repayment capabilities - fell from 19.3% in 2018 to 18.5% in 1H19.
Meanwhile, the leverage ratio for the vulnerable segment increased slightly from 8.8 times in 2018 to 8.9 times in 1H19.
On the other hand, the central bank found that the leverage for companies were still at a prudent level with the debt-to-equity ratio for business borrowers inching up from 24.7% in 2018 to 24.9% in 1H19.
Interest coverage ratio fell from 4.8x to 4.5x over the same period.
For the oil and gas sector, however, the impairment ratio remained high at 11.2% in 1H19 - above its five-year average of 6.6%.
The interest coverage ratio improved from 1.5x in Dec 18 to 3x in Jun 19.
“The positive development observed for the sector in 1H19 was the increase in business activities in the offshore segments which improved their debt servicing capacity.
“Some companies in this sector also continued to deleverage and this should help reduce the default risks from this segment to banks,” CIMB Research noted.
In its review, Bank Negara highlighted several risks notably the expanding glut in commercial real estate supply, softening global growth impacting corporate earnings and elevated household debt levels for lower income households, plus risks from cyber attacks.
Alliance DBS said the banking sector’s overall exposure to property developers with unsold housing units and commercial real estate (specifically offices and shopping centres) is relatively small at 2% and 3% of total system loans respectively.
Given the challenges, the central expects banks to increase their focus on asset quality preservation and to try to partially offset the slower growth conditions with greater operation cost discipline.
However, analysts note that most banks are embarking on more aggressive digital spending to stay competitive over the longer term.