RAM Ratings co-heads of financial institution ratings Sophia Lee.
PETALING JAYA: Domestic banks are on a solid footing amid external headwinds, according to RAM Rating Services Bhd.
Its co-head of financial institution ratings Wong Yin Ching told StarBiz while uncertainties from the US protectionist measures and ongoing geopolitical tensions could spill over to the economy, it is still too early to assess the full extent of these effects.
“With the United States and China being key trading partners of Malaysia, accounting for about 14% of the country’s total value-added production, the retaliatory tariffs by US president Donald Trump may dampen the positive trade momentum and Malaysia’s growth trajectory.
“Despite these external challenges, we anticipate banks’ credit profiles to hold steady. Banks are also entering the year in strong shape, with still-solid capital buffers and asset quality at its most robust ever,” she noted.
On loan growth, she expects loan growth to sustain at 5.5% in 2025, in line with RAM’s gross domestic product (GDP) growth expectation of 4% to 5% against last year’s 5.1%.
Wong said investment activity would gain from progress on multi-year infrastructure projects and greater realisation of record-high levels of approved investments last year, apart from the ongoing rollout of catalytic initiatives under the national master plans.
These factors are likely to stimulate business lending, she said.
On the retail front, she said home financing would remain a key growth driver, although automobile financing is set to normalise in line with lower total industry volume (TIV) forecast for 2025.
“Financing for the purchase of securities will continue to decline, impacted by the high redemption level of Amanah Saham unit trusts due to lower net returns.
“Potential disruptions to domestic consumption could come from adjustments to fuel subsidies and electricity tariffs expected in the second half of the year.”
The industry’s gross impaired loan (GIL) ratio trended down steadily throughout 2024, reaching a historical low of 1.44% as at year-end (end-December 2023: 1.65%).
Write-offs and recoveries helped reduce absolute GILs by 7.9% year-on-year (y-o-y).
RAM added stable economic growth and strong employment levels continue to support credit quality.
“While emerging risks may test banks’ asset quality, we expect GILs to stay well-contained, leading to a stable projected industry GIL ratio of around 1.4% in 2025,” Wong said.
In terms of profitability, performance across banks was positive in 2024, marked by a notable increase in pre-tax profits. A rise in non-interest income, led by trading, investment banking and wealth-related income, mitigated ongoing margin pressures.
She said although these gains are volatile and may not recur in 2025, banks remain on track for moderate profit growth, with consistent credit expansion and credit cost kept low at around 20 basis points (bps).
Margins are envisaged to stay largely unchanged this year, Wong said.
Industry deposits ticked up 3.3% in 2024 against 4.6% in 2023. As loan growth outpaced deposits, the loan-to-deposit ratio inched up further to 91% as at end-2024 (end-2023: 89%).
While this ratio has surpassed the pre-Covid-19 pandemic levels, other metrics like the liquidity coverage ratio and net stable funding ratio stayed healthy at 155% and 116%, respectively, as at end-June 2024, RAM noted.
On another note, Wong said banks are cautiously raising dividends as they recover from pandemic-era challenges, with most expecting new Basel III reform requirements to be manageable.
Banks are likely to continue prioritising efficient capital management in the future as one of the strategies to meet higher return-on-equity targets, she said.
The banking system’s common equity tier-one capital ratio fell to 14.3% at end-2024 (2023: 15.4%), returning to pre-pandemic levels.
Commenting on the digital banking landscape, Sophia Lee, RAM’s co-head of financial institution ratings, said: “Malaysian digital banks are also making a nascent mark on the industry, with all three operational banks ramping up deposit gathering efforts over the past year, driven by high-interest savings accounts.
“Digital banks have also recently expanded their services to include lending, strategically focusing on specific customer segments.
“All the three digital banks are still far from breaking even, with quarterly trends indicating that losses have yet to peak in view of high set-up costs.
“The key hurdle for these banks lies in retaining tech-savvy and price-sensitive customers in a competitive market while managing acquisition costs and scaling without significant risks. shareholders remain committed to supporting growth, as seen in capital injections received in 2024,” Lee said.
The three digital banks that are operational are GX Bank Bhd, AEON Bank Bhd and Boost Bank Bhd.
With an asset size cap of RM3bil per digital bank for the first three to five years of operations, the combined assets of the three banks would remain below 1% of banking system assets, RAM noted.
“At this level, we believe the neobanks should not pose any near-term threat to incumbent banks, which are also investing heavily in digitalisation and improving user experience,” Lee said.
