Catalysts for banking sector

Dato’ Sulaiman Mohd Tahir, Group CEO, AMMB Holdings Bhd

PETALING JAYA: The banking sector is well positioned to weather the tough business operating landscape and maintain its growth momentum.

Loans are expected to register growth of between 4% and 5% for the year compared with 5.7% last year.

Bankers and analysts expect the sector to be stable thanks to some growth drivers amid downside risks.

AMMB Holdings Bhd group chief executive officer Datuk Sulaiman Mohd Tahir said the challenges experienced in the first half of the year would likely continue for the rest of the year.

However, he is bullish about the sector, adding that there are strong drivers that would spur growth.

The services sector and the continuous implementation of infrastructure projects, are expected to boost credit demand, he told StarBiz.

He said the digitalisation measures outlined under Budget 2023, particularly for the small and medium enterprises, are expected to serve as a catalyst for growth.

“The economy’s full reopening and the subsequent revival of tourism will be another layer of optimism. Furthermore, international travellers have now rebounded to about 70% of pre Covid-19 pandemic levels, signifying the industry’s strong recovery and a return of global consumer confidence.“The robustness of domestic demand will continue to be a pivotal factor this year, complemented by a revitalised labour market and improved income environment to create a conducive ecosystem for growth.

“The race towards environmental, social, and governance compliance could bring more innovative banking offerings, such as green financing,” Sulaiman said.

He said the loan growth trajectory would likely persist in 2023, but at a more moderate pace, in view of the milder gross domestic product (GDP) growth this year.

For the year, the banking sector is expected to chart 4% to 5% loan growth underpinned by the projected GDP growth of 4.5% for 2023 against 8.7% last year.

RAM co-head of Financial Institution Ratings Wong Yin Ching.RAM co-head of Financial Institution Ratings Wong Yin Ching.

RAM Rating Services Bhd’s (RAM Ratings) co-head of financial institution ratings, Wong Yin Ching, said the domestic banking system is expected to remain stable in the second half of the year.

Despite the downside risks, banks are well positioned to weather the difficult operating landscape.

She is maintaining a 2023 loan growth projection of 5%, a more moderate expansion compared with the 5.7% achieved in 2022.

“Our forecast has considered the impact of higher borrowing expenses, intensified inflationary pressures and waning pent-up demand.

“This projection also aligns with our slower GDP expansion estimates of 4% to 5% for this year, compared with the robust 8.7% growth in 2022,” Wong said.

Banking system’s loans expanded by 5% year-on-year (y-o-y) in March 2023, with household loans outpacing that of businesses. Loan applications – a key indicator of loan growth – recorded a healthy 9.5% y-o-y increase in the first quarter (1Q23).

RAM-CTOS Business Confidence Index for 1Q23 indicated that forward-looking business sentiment had shown a slight improvement for the period, returning to an overall positive sentiment after dipping into negative sentiment in 4Q22.

“However, we continue to be cautious about the still pessimistic outlook on profitability due to elevated cost burdens and ongoing global challenges.

“Following the strong showing in 2022, profit outperformance for this year will be relatively limited as the further easing of impairment charges would be offset by margin compression and some moderation in loan growth.

“The four 25-basis-point hikes in the overnight policy rate (OPR) have given banks a shot in the arm last year, broadening the average net interest margin (NIM) of the eight selected banks in our coverage to 2.35% (2021: 2.28%).

“Notwithstanding the recent OPR increase, NIMs will be squeezed in 2023 by the rising cost of funds from the full impact of deposit repricing, keener deposit competition, and continued normalisation of current and savings account balances.

“At the after-tax level, however, the absence of the prosperity tax should lift earnings,” Wong said.

On gross impaired loans (GIL), she said there would likely be a certain level of deterioration in banks’ asset quality this year although the overall the metric would stay healthy.

RAM Ratings has pencilled in a worst-case scenario GIL ratio of 2% by year-end.

As at end-March 2023, the industry’s GIL ratio stood at a low 1.75% (2022: 1.72%).

On the Additional Tier-1 (AT1) capital securities impact on the banking sector, she said the reliance of Malaysian banks on AT1 capital securities is low as the hybrid bonds constituted less than 5% of total capital.

The outstanding AT1 bonds totalled RM12.6bil from 13 issuers, which comprised banks, Islamic banks and a bank holding company.

The write-off of Credit Suisse’s AT1 bonds by the Swiss regulator idespite shareholders receiving compensation had raised concerns among global investors.

“While domestic AT1 bonds also include similar features that allow the securities to be fully or partly written off in the event of non-viability or if a bank’s common equity Tier-1 (CET-1) capital ratio drops below 5.125%, the likelihood of such a scenario is considered remote.

“Bank Negara had clarified that local AT1 bonds would rank higher than equity in the event of a resolution.

“Moreover, the banking industry exhibits strong fundamentals with robust capitalisation (CET-1 capital ratio of 14.8%), diversified funding sources, and effective management of asset quality risks,” Wong said.

MARC Ratings Bhd head, rating portfolio, financial services institutions Mohd Izazee Ismail has forecast loan growth of 4% to 5% for this year.

Loan growth would likely return to the pre-pandemic levels (averaging at 4.5% from 2017 to 2019) as credit demand softens on the back of higher interest rates.

The effects were seen in the first quarter 2023 lower loan growth of 5% y-o-y, he noted.

He anticipates the GIL ratio to remain below 2% this year, adding that concerns on inflationary pressure and hikes in OPR could affect repayment capability.

Mohd Izazee expects interest income, which forms about 85% of the six largest banks’ gross income, to remain as the key contributor to banks’ growth for 2023, with household and business loans continuing to be the main driver to banks’ interest income.

UCSI University assistant professor in finance Liew Chee YoongUCSI University assistant professor in finance Liew Chee Yoong

Meanwhile, UCSI University Malaysia assistant professor in finance Liew Chee Yoong, who is also a research fellow at the Centre for Market Education, said the outlook for the banking sector in the second half would be tougher than the first half.

He said given the recent hike in the OPR, and the possibility of a further hike, the economy is moving towards a path whereby a financial crisis could possibly occur as global central banks are trying to maintain price stability by raising interest rates to control inflation.

“This will be a very difficult task as the hike in interest rates will increase financial risk and the risk of debt default as well as reduce the bond asset values in the bank’s balance sheet.

“This will be so if the commercial banks, particularly invest in bond securities as part of their investment portfolios.

“Bond values are inversely related with interest rates. This is the reason why US banks such as the Silicon Valley Bank and First Republic suffered bank runs and went into financial distress,” he said.

Liew said the banking sector could be in for other possible headwinds in the second half including a surge in the banking problems in the United States as a result of further hikes in interest rates.

He said in the event of a conflict between Israel and Iran in the Middle East due to Iran’s nuclear programme, global oil prices could increase drastically and this would also drive up global inflation and interest rates.

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