Banking sector records positive start, challenges remain

KUALA LUMPUR: Malaysia’s banking sector recorded a positive start this year but analysts believe that the sector will likely slow down for the remaining quarters this year.

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), 2017 banking industry loan growth started promisingly, advancing by 30 basis points (bps) to 5.6 per cent at RM1.53 billion driven by household loans at six per cent year on year (y-o-y).

Kenanga Research noted that business loans saw improvements with December 2016 and Jan 2017 growths at 4.5 per cent y-o-y and 5.2 per cent y-o-y.

“We are not surprised with this positive surge as it’s the usual trend for stronger loans in the earlier part of the year before tapering off.

“The strong growth was also due to loans disbursed (up 3.4 per cent y-o-y) outpacing loans repayments (down 0.7 per cent y-o-y),” the research arm said.

On an annualised basis, growth was at 5.1 per cent y-o-y, which was within the research arm’s expectations of five to 5.5 per cent growth for 2017.

Despite the positive loan growth, AmInvestment Bank Bhd (AmInvestment Bank) noted that loan applications continued to contract by 8.4 per cent y-o-y while loan approvals declined by 5.1 per cent y-o-y in January 2017.

“The levels of loan approvals dropped in January 2017,” it said.

Meanwhile, AmInvestment Bank noted that industry deposit growth improved to 2.6 per cent y-o-y in January 2017, higher than the 1.5 per cent y-o-y recorded in December 2016.

The research firm further noted that business enterprises’ deposits continue to contract but at a lower rate of decline at 0.3 per cent yo-y, while individual deposits expanded with a higher growth rate of six per cent y-o-y.

It also pointed out that industry current account, savings account (CASA) growth rose to 5.8 per cent y-o-y.

“This led to a higher CASA ratio of 26.7 per cent,” it said. “Liquidity eased slightly for the sector with a lower loan deposit (LD) ratio of 89.4 per cent.”

Kenanga Research observed that on a y-o-y basis, asset quality stabilised as system net impaired loans ratio was flattish at 1.2 per cent growth in impaired loans seems to be decelerating with business segment slowing at 4.8 per cent yo-y while the household segment slowed by 10 basis points (bps) to 6.4 per cent y-o-y.

As for the three-month deposit rate, Kenanga Research noted that it remained intact at 2.92 per cent and the average lending rate for January 2017 was up by six bps to 4.54 per cent.

“Interest spread was higher by five bps to 1.62 per cent in January 2017 from the previous month,” the research arm said.

The research arm believed this was a temporary blip as excess liquidity is still narrowing and stiff price-based competition continues to plague the market.

Given its view that the banks will be cautious/selective on asset quality with approval rate still tight, Kenanga Research projected that the momentum of the system loan growth will hence likely be subdued for 2017.

“Stiff price-based competition might trending upwards in 2017 as competition for deposits intensifying for excess and longer-term funding.

“However, better pricing on assets might minimise net interest margins (NIMs) compression,” it said.

Kenanga Research’s base case estimate for the system loan growth for 2017 was in the range of five to 5.5 per cent.