PETALING JAYA: The banking sector, which is one of the key sectors of the economy, may see slower credit growth this year due to the ripple effects from the prolonged US tariffs and the imminent trade war.
Although the country as an open economy may see some constraints in the banking sector, experts, however, said the strength of the economy fuelled by domestic demand, among others, would cushion the impact on the sector, hence supporting credit demand.
Furthermore, analysts said the banking sector’s strong capital buffers and diversified loan portfolios are expected to sustain loan growth amid headwinds.
The economy grew 5% in the fourth quarter of 2024 (4Q24), slightly above market expectations. For the entire year of 2024, the economy grew 5.1%, and for this year, the gross domestic growth (GDP) target is between 4.5% and 5.5%.
Meanwhile, local investment banks are projecting GDP growth of 4.9% for this year.
Analysts are forecasting a loan growth of anywhere between more than 4% and 5.5% for 2025. On a year-on-year (y-o-y) basis, the banking industry’s loan growth picked up slightly from 5.5% y-o-y at end- December 2024 to 5.7% y-o-y at end-January 2025.
This was lifted by both the household segment, which grew by 6%, and the business segment, which grew by 5.2%.
On March 4, the United States under President Donald Trump’s administration, imposed 25% tariffs on Canada and Mexico, and an additional 10% on China. On March 12, it will impose 25% tariffs on steel and aluminium.
On April 2, the administration will start rolling its global reciprocal tariffs, and 25% tariffs on the European Union, as well as for autos, chips and pharmaceuticals.
UCSI University Malaysia associate professor Liew Chee Yoong told StarBiz that since Trump reintroduced aggressive trade policies such as higher import tariffs, Malaysia’s banking sector could face indirect but significant headwinds.
“Malaysia is a trade-dependent economy, with significant exports in electronics, palm oil and petroleum products. A potential severe US-China trade war would disrupt global supply chains, reducing demand for Malaysian exports.
“The ripple effects include lower corporate earnings in export-oriented sectors like manufacturing, potentially leading to slower credit demand, higher credit risk from export businesses facing margin pressure, hence potentially impacting loan repayments and a reduction in business confidence.
“This will lead to lower investment activities and weaker business loan growth as well as currency volatility (a weaker ringgit), which could raise funding costs for banks with US dollar exposure,” he noted.
However, Liew, who is projecting a loan growth of 4% to 5% this year, said Malaysia’s banking sector has historically shown resilience. This is due to its strong capital buffers and diversified loan portfolios.
Unless trade tensions escalate drastically, the impact may be manageable, but it could limit upside potential in loan growth and asset quality in 2025, he said.
Liew, who is also a research fellow at the Centre for Market Education, said Malaysian manufacturing companies producing steel and aluminium would encounter reduced demand due to the 25% tariffs imposed on these goods when they are exported to the United States.
“Lower revenues for these firms will squeeze profit margins, leading to deferred capital expenditures and reduced demand for business loans, which may impact the performance of the banking sector in this country.
“Additionally, manufacturers in the semiconductor and pharmaceutical industries will face tariffs of 25% or higher for their exports to the United States.
“This will weaken their creditworthiness, potentially increasing non-performing loans (NPLs) in banks’ portfolios in the banking sector as about 60% of Malaysia’s total exports to the United States were from the electrical and electronics sector, with semiconductors accounting for one-third of that output,” Liew said.
RAM Rating Services Bhd’s co-head of financial institution ratings Wong Yin Ching, who is expecting the domestic banking system to remain resilient this year despite heightened global uncertainties, is maintaining her 5.5% loan growth projection for 2025, similar to 2024, at this juncture.
She said credit growth is supported by RAM’s GDP growth expectation of 4% to 5% for this year versus 5.1% in 2024.
“Economic growth, albeit lower, continues to be underpinned by domestic demand, given favourable labour market conditions and accommodative interest rates.
“Both public and private investments are also expected to drive further growth amid ongoing rollout of multi-year infrastructure projects and increased realisation of approved investments.
“That said, risks to loan growth have tilted to the downside this year. Subsidy rationalisation and adjustments coupled with elevated global headwinds and geopolitical tensions may dampen consumer and business sentiments,” Wong noted.
MARC Ratings Bhd head of financial services rating Elmer Lim Chon Meng said the potential impact to banks would depend on Malaysia’s position within the scope of tariffs under Trump’s trade policies, one of which could be on semiconductor exports.
“If materialised, we see this consequently translating to semiconductor exporters having reduced need for financing.
“Malaysia may also find itself benefiting from a diversion of trade flows as Chinese goods are expected to be impacted more strongly by US tariffs.
“Nonetheless, a recurring narrative is that of domestic consumption fuelling GDP growth, which could provide resilience facing external factors,” he said.
Lim said key contributors to loan growth would include the manufacturing, construction, and household sectors, with the construction sector benefiting from infrastructure and data centre projects.
Consumer loans would be supported by higher average household incomes driven by civil service salary adjustments and minimum wage increases.
He expects industry loan growth to come in at 4.8 to 5% in 2025. Notwithstanding higher margins from business loans, Lim expects retail loans to continue to be the bigger contributor to interest income growth from the perspective of balance sheet growth.
“On non-interest income, we expect fee income from advisory activities to be supported by sustained activity in the bond market where corporate bond issuance is projected to increase slightly from RM 124bil in 2024 to RM125bil in 2025.
“Fee income related to the facilitation of trade could still continue to perform stably,” Lim said.
In terms of net interest margin (NIM), he said against the backdrop of delayed rate cuts by the US Federal Reserve (Fed) to tackle lingering inflation, he believes contained domestic inflation and strong growth would provide room for overnight policy rate (OPR) to remain flat throughout 2025.
In this regard, Lim said banks’ NIMs would be stable in the absence of benchmark interest rate fluctuations. NIM, a measure of profitability, is the spread a bank earns between borrowing and lending. A wider NIM indicates higher earnings for banks.
At its latest Monetary Policy Committee (MPC) meeting this month, Bank Negara kept its policy rate unchanged at 3% in line with market expectations.
The central bank’s benchmark lending rate has remained unchanged since May 2023. The bank expects the strength in Malaysian economic activity to be sustained in 2025, anchored by domestic demand, despite external uncertainties.
RAM’s Wong said for 2025, she expects banks to see moderate profit growth, underpinned by steady loan expansion and still-benign loan provisioning expenses.
Margins are anticipated to stay largely stable this year, in line with RAM’s view that the OPR would remain unchanged for the year, she said.
As for asset quality, she said: “Malaysian banks’ track record of sound underwriting practices and ample loss absorption buffers continue to underpin their robust asset quality.
“The system’s gross impaired loan (GIL) ratio improved to a historical low of 1.44% as at end-December 2024 against 1.65% as at end-December 2023. We envisage banks’ asset quality to stay intact this year.”
UCSI Liew foresees a stable to slightly elevated GIL ratio, possibly around 1.7% to 1.8%, compared to 2024. He said this is because exporters and small and medium enterprises (SMEs) in trade-sensitive sectors could see higher stress due to global demand risks.
“Household debt remains high in Malaysia, so any economic slowdown may impact consumer loan repayments. Additionally, prudent provisioning and regulatory oversight should also keep deterioration manageable,” he said.
MARC’s Lim said a steady OPR in 2025 would continue to support households’ current ability to service debts, while broad-based recovery particularly in the tourism and manufacturing sectors will play a role in business loan performance.
“We believe banks’ gross impaired loans have room to improve further in 2025, albeit at a reduced pace,” he said.
