Households to drive loan growth


PETALING JAYA: As the economy picks up steam in the current quarter, banking sector earnings are expected to extend their recovery going into 2022 while loan growth is set to be fuelled by household loans.

With the reopening of the economic sectors as the country moves into the endemic phase, pent-up consumer demand is envisaged to boost household loans next year which are anticipated to grow at a faster phase than business loans.

The industry’s loan growth eased from 3.1% year-on-year (y-o-y) as at end-July 2021 to 2.5% y-o-y at end-August in the same year due to disruptions from lockdowns on banks’ lending activities.

There was a slowdown in the momentum for both major loan segments – from 4.2% y-o-y at end-July to 3.4% y-o-y at end-August for household loans, and from 1.3% y-o-y at end-July to 0.8% y-o-y at end-August for business loans.

However, there were signs of gradual normalisation in banks’ lending activities in August, reflected in the month-on-month increase of 12.5% in loan applications and 9.5% in loan approvals in August.

Responding to email queries from StarBiz, OCBC Bank (M) Bhd CEO Datuk Ong Eng Bin said that he expects a moderate loan growth in 2022, driven by the household segment from pent-up consumer demand as the economy and borders reopen.

He said corporate lending would still be robust, as there may be merger and acquisition opportunities, given the improved economic environment and higher risk taking.

“Businesses, especially the small and medium enterprises (SMEs), while remaining cautious, will require financing and/or working capital facilities to rebuild their balance sheets as their cash flows have been depleted over the prolonged lockdowns, and government guarantee schemes continue to complement the banks lending to these viable businesses,” he said.

Ong expressed his optimism on the sector moving into 2022, adding that the economic growth next year would be supported by the reopening of all sectors after a gradual recovery in the fourth quarter.

He said banks with healthy capital and flush liquidity buffers would continue to support their financial intermediation activities.

Higher loan approval is expected in the second half of next year with greater clarity on the underlying asset quality as relief programmes are phased out, he added.

“Although banks have since end-2020 built up substantial provisions for the weaker outlook, credit cost is expected to stay elevated above pre-pandemic levels due to the lag effect on credit profiles.

However, it is expected that provisions in 2022 will be lower than in 2020 and in 2021 which bodes well for the sector,” Ong noted.

RAM Rating Services Bhd co-head of financial institution ratings Wong Yin Ching believes that the domestic banking industry would remain resilient, underscored by the industry’s strong fundamentals although downside risks linger.

With the gradual reopening of the economy and the high adult vaccination rate exceeding 90%, she said loan growth is expected to close the year at about 3%. For 2022, Wong foresees loan growth at around 4%, with household loans anchoring growth.

“While we envisage a pick-up in credit demand from businesses, growth is unlikely to be steep from the current anaemic levels.”

Based on RAM’s projections, the industry’s gross impaired loan (GIL) ratio may climb to 2.3% to 2.5% in 2022. The banking system’s GIL ratio stayed benign at 1.67% as at end-August 2021 (end-December 2020: 1.56%)

“While recognition of impaired loans is deferred, banks have been building up their provisioning buffers since 2020. The selected eight local banks reported an average credit cost ratio of 57 basis points (bps) in the first half of 2021 (2020: 84bps), with the full-year 2021 forecast at 60bps to 70bps. The credit cost ratio is anticipated to be at about 50bps to 60bps next year, although this is a conservative estimate,” she said.

Overall, Wong envisages banks to pose a slight improvement in profit performance next year. Net interest margin could see a mild increase on account of a potential overnight policy rate hike in the second half of 2022.

“Further earnings upside could emanate from a faster-than-expected economic recovery, and more favourable labour conditions, reducing the level of provisioning expenses and boosting loan demand,” she said.

CGS-CIMB Securities equities research analyst Winson Ng, who is reiterating his “overweight” call on the banking sector, forecast banks’ earnings recovery to extend into 2022, in anticipation that the Covid-19 outbreak would continue to ease next year.

“We project a core net profit growth of 7.3% for banks under our coverage by next year. This projection is underpinned by a forecast 4.8% drop in loan loss provisioning for 2022, a decent 5.9% increase in net interest income expected for 2022 (albeit slower that the projected 8.3% rise in 2021), and anticipated normalisation in the growth of non-interest income to 2.3% next year compared with an expected decline of 4.2% in 2021,” he said.

Despite the recent announcement by the Ministry of Finance (MoF) on the Financial Management and Resilient Programme (URUS) for borrowers in the bottom 50% (B50) income group, Ng said the research house’s expectation of an earnings recovery with net profit growth estimation of 15.8% in 2021 and 8.2% in 2022 is intact.

The programme, for borrowers in the B50 income group, would be set up by the banking sector soon. Facilities to be provided include interest exemption for three months and lower instalment amounts for up to 24 months, as well as a lower interest rate. Eligible borrowers can apply for this from Nov 15 to Jan 31, 2022.

Meanwhile, Maybank IB Research said it is maintaining its positive stance on the sector on expectations that aggregate net profit for the banks under its coverage would rebound 14% y-o-y in 2022, as economic recovery gathers momentum and credit costs moderate.

Ng said he expects loan growth to normalise to 4% to 5% by next year in line with economic recovery, adding that he anticipates a growth of 5% to 6% for household loans and 3% to 5% for business loans.

“We project a loan growth of 2.5% to 3.5% for 2021, as loan growth has been negatively impacted by the movement control orders,” he noted.

He said for next year, there could potentially be weaker net interest margins, as low-cost deposits could decrease following the reopening of the economy.

The competition could also pick up in deposits on anticipation of an improvement in loan growth in line with economic growth, he said.

As for gross impaired loans (GIL), Ng said he expects GIL to stay elevated at 1.8% to 2.0% as at end-December 2022, compared to the projected 2% at end-December 2021.

This is because GIL would likely rise after the end of the loan moratorium and repayment assistance programmes, he noted.

RHB Investment Bank Bhd regional equity research head Alexander Chia said he believes Malaysia was firmly on a recovery path, albeit an endemic recovery.

“We believe banks’ earnings will also be lifted by lower impairment charges and expect the pandemic-related provision cycle to end soon.

Banks have been setting aside substantial pre-emptive provisions since 2020 in anticipation of the eventual slippages in asset quality, which is delayed by the latest Pemulih moratorium, he said. The slippages may only emerge in the first half of 2022.

“The expiry of the moratorium and target relief assistance for affected borrowers in 2022 are issues that banks would expect to manage.

“That said, we believe that banks would have sufficient provision buffers to withstand any negative impact, are well capitalised and are in a good position to resume dividend payouts,” Chia said.

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