Banking to stay steady | The Star

PETALING JAYA: Analysts and fund managers are maintaining their outlook that the domestic banking sector will remain sturdy, following the release of the Financial Stability Review – Second Half 2023 (FSR2H23) on Wednesday.

The report, published by Bank Negara, revealed that the country’s banks had remained buoyant and will continue to be financially firm, underpinned by an economic environment that is driven primarily by domestic expenditure and external trade recovery.

RAM Ratings co-head of financial institution ratings Wong Yin Ching is likewise keeping a stable view on the Malaysian banking sector while expecting Malaysia’s lenders to sustain their credit profiles and keep up their resilience.

Projecting loan growth to ease to around 5% in 2024, after the 5.3% expansion last year, she told StarBiz: “Softer demand from the consumer front is anticipated to weigh on loan expansion this year, as the government’s re-targeting of subsidies will likely dampen discretionary consumer spending.”

However, she said the slowdown in consumer growth is expected to be partly mitigated by business loans, which will benefit from a rebound in exports and global trade.

Wong believes asset quality of the local banking system is healthy, as the gross impaired loan ratio is estimated to settle between 1.6% and 1.7% by end-2024, keeping close to its end-2023 level of 1.65%.

She said excess provisions held by banks will provide a strong buffer to withstand any credit challenges.

On the flipside, she predicted the overnight policy rate (OPR) will be kept unchanged at 3%, and as such, deposit competition will persist this year while net interest margins are envisaged to stay largely suppressed.

“On the whole, banks’ profitability, while still intact, will see limited upside in light of the difficult operating landscape and still-elevated operating cost.

“That said, strong balance sheets with low levels of impaired loans, robust loss absorption buffers and diversified funding continue to support banks’ fundamentals,” she said.

Similarly, Areca Capital Sdn Bhd chief executive Danny Wong is mildly positive on the banking sector, reinforced by the industry’s sound asset quality, decent liquidity and a strong total capital ratio.

“This could mean a potential of higher dividend payouts for banking counters,” he said.

The FSR2H23 report had forecast that growth-conducive market conditions and the continued availability of loan repayment assistance could lend strength to the overall debt-servicing capacity of the country.

It highlighted the growth in take-up rate for household, vehicle and unsecured loans in the second half of 2023, signalling that the trend in domestic lending and consumption may continue to point north.

With the central bank targeting a gross domestic product (GDP) expansion of 4% to 5% this year, Danny believes stronger foreign investment and capital inflow are key for Malaysia to hit a commendable growth of 4.5%, boosting business and consumer confidence.

Like Danny, abrdn Islamic Malaysia Sdn Bhd chief executive Gerald Ambrose is maintaining his guarded optimism towards Malaysian banks, observing that as a worldwide trend, banking stocks are affordable and pay good dividends that are above deposit rates.

Noting that Bank Negara has done well monitoring the domestic banking industry, he opined that loan growth should chug along well at 5% this year and that barring any major shocks, non-performing loans should not worsen.

On domestic consumption, Ambrose told StarBiz that while there have been signals recently of consumers feeling the pinch, it has been reassuring to hear from the Finance Ministry that it will continue with its aid initiatives for the B40 group.

“Any assistance to the B40 would mean more private consumption and that could only be good for the economy,” he said.

Separately, Socio-Economic Research Centre executive director Lee Heng Guie believes Malaysian banks are on a sound footing, given the strong capital and liquidity buffers to support financial intermediation for domestic demand and business activities.

“With Bank Negara’s estimated higher economic growth of 4% to 5% and private investment growth of 6.1% in 2024, underpinned by the implementation of public infrastructure projects and some projects announced in 2024 Budget as well as the export recovery, this helps to drive loan demand for working capital and business expansion,” he said.