Dynamic duo: Lee (left) and Wong are RAM Ratings co-heads of financial institution ratings. They expect industry loans to grow by a more moderate 5% this year from 5.7% last year.
PETALING JAYA: The domestic banking sector is well positioned to face potential asset quality deterioration arising from inflationary pressures, higher interest rates and the threat of slower global growth, according to RAM Rating Services Bhd.
Its co-head of financial institution ratings Wong Yin Ching, who is maintaining a stable outlook on the sector, told StarBiz the robust loss absorption buffers, diversified funding and well-controlled asset quality risks continue to anchor the banking system’s resilience.
She anticipates industry loans to grow by a more moderate 5% in 2023 from 5.7% in 2022, with Islamic banks still expected to lead growth. Last year, over 80% of overall loan growth was driven by the Islamic banking sector.
“Rising costs and dissipating pent-up demand are weighing on borrowing appetite. This is also in line with our slower gross domestic product expansion estimates of 4% and 5% this year compared to 8.7% in 2022.
“We have already seen credit demand easing as consumers think twice before committing to big-ticket purchases. Loan applications, one leading indicator of loan growth, have been dropping off in recent months,” Wong said.
RAM’s fourth quarter 2022 (4Q22) Business Confidence Index indicated that forward-looking business sentiment turned negative for the period, with over 80% of firms participating in the survey citing elevated costs as their greatest concern.
That said, she said China’s reopening would be a tailwind for business loan growth, given that it is the nation’s largest trading partner and a sizeable contributor to our tourism industry pre-Covid-19 she noted.
On gross impaired loans (GIL), Wong opines credit quality weakening would be contained, considering banks’ prudent underwriting standards.
“The GIL ratio could show a measured uptick to 2% at most by end-2023, which is still healthy,” she said. The industry’s GIL ratio was relatively stable as at end-2022 at 1.72% (2021: 1.68%).
She added that GIL could face upward pressure as the higher cost of living and the 100 basis points (bps) cumulative rate hikes last year diminish borrowers’ repayment ability, especially those in the lower income group and smaller enterprises.
The continued phasing out of remaining loan relief measures could also nudge up delinquencies although the average proportion of domestic loans under relief in the rating agency’s eight selected banking groups has reduced to below 3%, RAM said.
The eight banks are Affin Bank Bhd, Alliance Bank Malaysia Bhd
, AMMB Holdings Bhd, CIMB Group Holdings Bhd, Hong Leong Bank Bhd, Malayan Banking Bhd, Public Bank Bhd and RHB Bank Bhd.
Banks have built up strong loss absorption buffers since the pandemic started. The GIL coverage (including regulatory reserves) of the eight banks was a solid 132% as at end-2022 (end-2019: 107%).
In view of ample provisions frontloaded in the previous two years, the average credit cost ratio shrank to 29 bps in 2022 (2021: 48 bps) – back to pre-crisis levels, the rating agency said.
RAM estimates a better credit cost ratio of around 25 bps in 2023. Meanwhile, the rating agency’s co-head of financial institution ratings Sophia Lee said she expects easing pandemic threats and positive customer repayment trends to justify lower impairment charges.
“Some management overlay writebacks may be seen this year, though the quantum will be subject to banks’ judicious assessment of the operating environment. Some banks have already factored in partial overlay writebacks in their credit cost guidance for the year,” Lee noted.
For net interest margins (NIMs), she said despite expecting another 25 bps rate hike this year, RAM foresees that NIMs would narrow on account of higher funding costs from deposit repricing and keener competition.
December 2022 saw the expiration of the flexibility accorded by Bank Negara in allowing the recognition of government securities for compliance with the statutory reserve requirement.
This would also contribute to margin contraction.
She said profit outperformance this year would be relatively limited as lower provisioning expenses are offset by tapering margins. At the after-tax level, Lee said however, the absence of the prosperity tax should boost earnings.
Commenting on digital banks, Lee said the experience in other markets has shown that the road to profitability and sustainable growth for digital banks is not easy.
She said incumbent lenders have been investing heavily to keep pace with rapid digitalisation in defending their turf.
“Digital banks are geared towards serving the underbanked and are subject to a temporary asset threshold (RM3bil). Their threat to incumbents in the immediate term, therefore, will be limited.
“Each of the five consortiums which have been awarded digital banking licences last year has an existing captive ecosystem it can leverage on.
“Nevertheless, challenges are rife, including having to expand their franchise outside their ecosystem, secure stable funding, design suitable products for their target segments, effectively manage risk and pricing, and operate in a cost-efficient manner,” Wong said.
On the recent collapse of Silicon Valley Bank (SVB) and the two other US banks, Wong does not expect the event to have any rating impact on Malaysian banks.
“Fundamental differences observed in the business and balance sheet profiles of commercial banks in Malaysia anchor our view.
“Bonds typically make up less than 25% of commercial banks’ assets, unlike SVB which had over 50% of its asset base in such securities.
“Fair value losses in domestic banks were significantly smaller, thanks to Bank Negara’s milder pace of rate hikes and banks’ prudent strategy of holding shorter-duration bonds,” Wong noted.
The domestic banking industry’s common equity Tier-1 capital ratio stayed a robust 14.9% as at end-2022 (end-2021: 15.5%).
In Malaysia, loans and deposits are also diversified across sectors, in contrast with SVB’s heavy focus on the tech sector and start-ups, she said.
Bank Negara’s strong regulatory oversight and good track record should ensure the continued financial stability of the Malaysian banking system.
