RAM Ratings sees loan growth below 5% after softer earnings

RAM

KUALA LUMPUR: RAM Ratings expects some downside risk to its 5% loan growth projection for 2019 due to softer earnings in the quarter ended March 31 and also the cautious environment from the US-China trade war.

The rating agency said on Thursday Malaysian banks’ most recent quarterly financial results showed softer earnings, weighed down by sluggish loan growth and compounded by narrower net interest margins (NIMs). 

“The protracted trade dispute between the US and China has aggravated the cautious stance of businesses and consumers, with no resolution envisaged in the short term,” it said.

RAM Ratings said the sector’s NIM was set to narrow further following the 25 basis points cut in the overnight policy rate (OPR) in May. The OPR was reduced to 3%.

RAM’s co-head of financial institution ratings Wong Yin Ching said: “On a brighter note, banks are facing this difficult operating environment from a position of strength. Their asset quality has stayed robust, with a gross impaired loan (GIL) ratio of just 1.51% as at end-April 2019. 

“The eight anchor banks’ average credit cost ratio remained benign at 25 bps in 1Q 2019, even after excluding a one-off recovery from debt sale by a particular institution. We do not expect the sector’s GIL ratio to exceed 1.60% this year.”

The Malaysian banking system’s on-year loan growth was a lacklustre 4.5% in April 2019 (2018: 5.6%), marking the fifth consecutive month of the downtrend since November 2018. 

As for loan applications, they fell 4.7% on a three-month moving average basis, although loan approvals edged up 1.6%. 

Also credit demand from both households and businesses had waned, with noticeably slower business loan growth. 

The eight anchor banks reported a weaker average pre-tax return on assets of 1.35% and return on equity of 13.2% in Q1, 2019 (Q1, 2018: 1.43% and 14.1%). 

“All but one posted thinner NIMs, reflecting the unrelenting competition for retail and SME deposits as well as the anaemic growth of current and savings accounts. 

“Earnings accretion, although weaker, will continue to lend support to the already healthy capitalisation levels of these banks,” RAM Ratings said.