BANKS are cautiously optimistic of loan growth as businesses take a more cautious stance, while consumers will continue to feel the impact from higher inflation.
Loan growth is expected at between 4% and 5.5% in 2023, on the back of Malaysia’s economic stability which will support the creditworthiness of local businesses and consumers.
It had moderated at the end of November 2022, to 5.5% (6.5% in October 2022) as business loan growth slowed to 3.4% (5.2% in October, 2022).
However, household loans expansion remained resilient, backed by home, auto and credit card lending.
With the economic recovery as well as improving consumer and business sentiment, the Public Bank Bhd group will continue to judiciously grow its lending portfolio.
This is backed by its strong market position in the consumer as well as small and medium enterprise (SME) lending space, together with its efficient service delivery, said Public Bank managing director and CEO Tan Sri Tay Ah Lek.
The group will continue to focus on its organic growth strategy in retail and commercial banking as well as further strengthen its resilient business model and core competencies, including its superior asset quality, efficient cost management and customer service excellence to weather through possible challenges ahead, added Tay.
RHB Bank Bhd is cautiously optimistic on Malaysia’s economic outlook, which will be supported by resilient domestic demand with private consumption as the main driver of growth.
However, low and middle-income households, as well as micro and small SMEs, will be the most impacted with moderating growth, still elevated living costs and the increased costs of borrowing.
Bank Islam Malaysia Bhd expects moderate financing growth of about 8% for 2023, with the bank as the main driver from retail segments.
The outlook is relatively benign with spillover of growth headwinds from 2022; Malaysia is not at risk of a recession as its fundamentals remain solid while regional economic prospects are not as gloomy as initially feared, said Bank Islam CEO Mohamad Muazzam Mohamed
Both inflation and geopolitical conflict will remain themes in 2023, despite the opening of borders and China’s ditching of its zero Covid-19 policy.
Higher net interest margin
Areas that can cushion the moderation in loan growth include higher net interest margins (NIM) and non-interest income.
The current rounds of interest rate hikes augur well for banks’ NIM which is the net interest income from products like loans and mortgages, after deducting the outgoing interest it pays to holders of savings accounts and certificates of deposits.
But there are factors that may pressure NIM.
RHB Bank foresees two to three hikes in the benchmark overnight policy rate (OPR) in 2023, which could potentially peak at 3.5%.
This is in view of the decent economic recovery and elevated inflationary pressure.
NIM is expected to improve but not as significantly as in 2022, due to competition for deposits and higher cost of funds, said RHB group managing director and group CEO, Mohamad Rashid Mohamad.
Bank Islam expects smaller sequential NIM expansion, as banks will have different variable (where the rate charged on the outstanding balance varies with changes in the market rates) and fixed rate financing structures.
NIM could be further pressured with the repricing of fixed deposits (FDs) where banks may have to pay higher rates, generally done within six to nine months from the first OPR hike in May, 2022.
Price competition for FDs, as current-account-savings-account deposits are expected to be substituted to FDs, will also affect NIM.
In terms of non-interest income, Public Bank is well-prepared to tap on the growing need for financial protection and financial freedom from non-traditional products like unit trusts and bancassurance.
The group’s unit trust business undertaken by its wholly-owned subsidiary, Public Mutual Bhd, continues to achieve positive gross sales, tapping on its large customer base and strong brand name with the continuous launch of new funds.
Public Bank group will continue with its digitalisation efforts to grow its fee-based income.
RHB Bank group expects the outlook this year to be better especially in terms of fee income such as brokerage fees, investment bank-related fee income and commercial banking; however, these may not return to pre-pandemic levels.
Trading and investment income at RHB are still expected to recover although challenges to the pace of economic recovery remain, added Rashid.
Monitoring non-performing loans
In terms of the gross impaired loans (GIL) ratio of non-performing loans to total gross loans, Bank Islam sees the industry’s GIL ratio may rise to between 2.5% and to 3% over the next two years.
This is as asset quality is expected to deteriorate with the expiry of financial assistance programmes amid heightened inflation and rate hikes.
Public Bank group has been able to sustain a low and stable GIL ratio (0.3% as at September, 2022, against industry’s 1.8%), largely due to its longstanding prudent credit culture.
This is supported by Public Bank’s prudent lending policy and its continuous, extensive efforts to provide financial assistance to borrowers with temporary cashflow constraints.
With the uncertainties ahead, the group will continue its prudent approach and its asset quality is expected to remain manageable, given its resilient credit profile.
Public Bank has pre-emptively set aside high loan loss reserves which will provide further buffer in the event of any potential risks.
RHB Bank group expects an uptick in certain vulnerable sectors; however, an improved GIL ratio for the group is expected in 2023 compared to 2022, amidst continued recovery efforts and expansion in loans.
Signs of stabilisation are seen as the GIL ratio had fallen marginally from 1.85% in July, 2022, to 1.82% at end-September, 2022, said CGS-CIMB Research in a report.
Prudent coverage for loan loss
The industry is expected to remain well-buffered in terms of its loan loss coverage (LLC) ratio which indicates the ability of the bank to bear losses on loans, said Bank Islam.
As of November, 2022, the industry’s financing loss coverage ratio, including regulatory reserves, continues to record a prudent level of 116.5% of impaired loans, with total provisions accounting for 1.8% of total loans.
RHB Bank group’s target is to maintain the LLC ratio at above 100%; it continues to remain prudent and prepared to set aside any necessary provisions. RHB will monitor the environment regularly to ensure that sufficient buffers are maintained.
As at September 2022, Public Bank group’s LLC ratio stood at 339.5% compared to the industry’s at 97.8%. Including regulatory reserves, Public Bank group’s LLC ratio is at 359.6%.Public Bank group expects some normalization of the LLC ratio, depending on the trend of impaired loans, the speed of the economic recovery and any other uncertainties ahead.
Public Bank group continues to monitor closely the repayment trend of borrowers and any potential stress to its asset quality while ensuring a prudent level of LLC is maintained with a sufficient level of loan buffers.Banks’ loan loss provisioning in funds set aside for default or problem loans, for the third quarter of 2022, is estimated by CGS-CIMB to have declined 40% to 50%.
This, together with still, one of the strongest loan growth in recent years, and expansion in NIM, would have supported banks’ net profit growth in the third quarter of 2022, said CGS-CIMB Research.
Banks are making preparations to deal with challenges and uncertainties in 2023.
Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.