Bright spot for banking sector

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“We are of the view that credit impairments and incremental credit costs for 2023 will remain manageable with the support of moderate interest-rate hikes and continued economic recovery.” Gb6uk Sulblob1 Mpif Tbil%

PETALING JAYA: With 2022 coming to an end, banks are expected to brace for a tougher business environment amid macro-economic headwinds in 2023.

Despite these challenges, bankers and analysts said not all is doom and gloom as there are bright spots that would position the sector on a growth trajectory, noting that they expect a decent loan growth of between 4.5% and 5.5% for next year.

They also expect positive earnings growth for 2023 amid a challenging business and economic landscape.

AMMB Holdings Bhd (Ambank) group chief executive officer Datuk Sulaiman Mohd Tahir told Starbiz that global headwinds, including rising inflationary pressure from geopolitical uncertainties, disruption of global supply chains as well as hikes in commodity prices are expected to remain elevated.

He expects loan growth for the sector in 2023 to be in the range of 4.5% to 5.5% on the back of a 4.5% gross domestic product growth forecast.

For 2022, he anticipates a loan growth of between 6% and 6.5%.

The banking system’s annualised loan growth in September 2022 stood at 5.8% compared with 4.6% in 2021.

“We are of the view that credit impairments and incremental credit costs for 2023 will remain manageable with the support of moderate interest-rate hikes and continued economic recovery.

“Banks have accrued loan-loss reserves since the onset of the Covid-19 pandemic and we see these buffers as being adequate against expected credit losses in 2023.

“In terms of the terrain for 2023 for local banks, Ambank expects competition to intensify, particularly for longer-term deposits next year,” he said.

Sulaiman said despite the challenging circumstances ahead and based on the group’s successful track record over the years, it has been able to capture market share given its solid fundamentals and driven by the bank’s dynamic team.

OCBC Bank (M) Bhd CEO Datuk Ong Eng Bin, meanwhile, projected a loan growth of 5% next year, and concurred that 2023 would be a challenging year for the banking sector.

The sector would benefit from the positive, albeit slower, growth projected for 2023. However, he said the overall macro outlook remains volatile as the country is closely tied to the world economy which is facing challenges.

Inflation, weak global growth, coupled with looming recession in developed countries, geopolitical tensions and the Russia-ukraine war would continue to have an impact on the economy, which in turn would affect business and consumer sentiments and the banking landscape, he noted.

In terms of earnings for next year, he said although banks are currently slightly impacted by weaker trading and investment performance in light of market uncertainties, earnings would improve on the back of expanded margins and lower credit costs but weighed down by the additional 9% prosperity tax (on the chargeable income of above Rm100mil).

“Moving into a volatile 2023, we expect positive trends in net interest margin (NIM) to continue with improved fee and trading performance as interest rates stabilise while credit costs normalise,” Ong said.

NIM is a measure of the difference between the interest income generated by banks and interest paid out to depositors. A wider NIM indicates higher earnings for banks.

Ambank’s Sulaiman, who is expecting NIM to increase by around 1.5 basis points (bps) in the fourth quarter of 2022, said the bank would remain steadfast in its efforts to drive business organically, moving forward, by looking into strategic initiatives that allows it to achieve cost savings.

On the banks’ profitability front, RAM Rating Services Bhd co-head of financial institution ratings Wong Yin Ching said banks’ NIMS are slated to widen this year in view of the cumulative 100 bps overnight policy rate (OPR) hikes.

Nonetheless, she expects the situation to likely reverse in 2023, with margin contractions in sight as deposit repricing catches up, competition remains stiff and proportion of current account and savings account (CASA) normalises.

“Our view has taken into account a potential 25 bps OPR increase in the first quarter of next year (1Q23).

“On the whole, we envisage banks to pose an improvement in profit performance next year.

“Narrower NIMS and slightly slower loan growth would be more than offset by lower impairment charges or writebacks as well as absence of the one-off Cukai Makmur,” she added.

RAM’S Wong believes that the domestic banking industry would remain fundamentally resilient despite the prevailing macroeconomic headwinds.

Overall credit stresses have eased somewhat with the reopening of the economy although the rating agency is watchful on challenges related to heightened cost pressures, heavier borrowing costs and slowing global growth, she said.

She said even as bad loans trend up, provisioning expenses are not anticipated to rise in tandem, given that banks have built up robust provisioning buffers since the onset of the pandemic.

“For 2023, we foresee banks recording modest loan impairment charges or even net

writebacks for some, as excess management overlays may be reversed. Notwithstanding, we believe banks will be judicious in releasing these preemptive provisions,” Wong said.

She forecasts the industry’s gross impaired loan (GIL) ratio to come in at a higher 2.2% in 2023 (see chart), adding that the figure is still considered healthy. GIL ratio inched up to 1.82% as at end-september 2022 against 1.68% as at end-december 2021.

UCSI University Malaysia assistant professor in finance Liew Chee Yoong, who is also a research fellow at the Centre for Market Education, anticipates more challenges for the banking sector this year.

He said this is partly due to the fact the US Federal Reserve (Fed) is expected to continue to hike interest rates, of which Bank Negara would follow suit.

The banking sector, he said, is part of financial intermediaries which play a very significant role in the country’s financial system, as it helps to channel funds from the savers (depositors) to the users of funds (borrowers) in the economy.

If interest rates continue to increase in 2023, demand for bank loans would be further reduced as debt financing becomes more expensive, he said.

Liew said this would reduce the channelling of funds from savers to users that would weaken the effectiveness of the financial system as a whole.

“In the long run, this will generate the under-investment problem, which will hinder the country’s economic development,” he noted.

Liew, who is projecting a loan growth of between 1% and 3% for 2023, expects bank earnings to fall next year due to further hike in interest rates by Bank Negara and also in anticipation of a major global recession.

“The banking sector in this country needs to perform stress test regularly to ensure they have sufficient capital to withstand the consequences of further hikes in interest rates in 2023 as well as the expectations that a major global recession will occur next year.

“If interest rates are further hiked in 2023, the cost of financing will become more expensive for borrowers and as a result, financial

risk and loan default risk will increase. This will likely increase GILS in 2023,” he said.