KUALA LUMPUR: Malaysia's banking sector is well-positioned to navigate trade tensions and softer growth, driven by a strong labour market and stable household finances, said S&P Global Ratings.
The rating agency said banks’ active management of funding costs is expected to counter the impact of
heightened competition although the strength of retail deposit franchise would be a key differentiator.
"The banking sector will see slower loan growth of 4.0-5.0 per cent over the next two years, compared with 5.5 per cent in 2024," it said in a statement.
For the first half of 2025 (1H 2025), corporate loan growth moderated to 3.4 per cent, amid heightened uncertainty over tariffs.
While S&P Global noted that tariff policies are now clearer, it expects corporate demand to remain soft due to tough external conditions, which could delay expenditure plans.
It added that some corporates are tapping bond markets amid lower rates.
"Infrastructure and data center projects may provide upside from both a growth and profitability perspective, especially in the Johor-Singapore Special Economic Zone (JSSEZ).
"Even if local banks are not providing the end financing, they can still earn fee income from arranging or syndicating the deals," it said.
Retail Credit Growth Remains Stable
S&P Global expects retail credit to grow faster than corporate, mainly driven by housing and car loans.
The agency anticipates annual loan growth in the retail segment to remain stable at about 5.0-6.0 per cent, supported by a low unemployment rate and rising wages.
It also noted that banks are enhancing offerings in wealth management and foreign exchange transactions to drive higher non-interest income, which is positive for long-term profitability.
"Their focus on small-to-midsize enterprises (SMEs) to improve risk-adjusted returns could also help the banks maintain stable profitability," it said.
Loan-to-Deposit Ratios Set to Rise
S&P Global believes sector-level loan-to-deposit ratios (LDR) would rise to 90-95 per cent over the next two years.
It also expects Islamic banks’ financing-to-deposit ratio to stay above 100 per cent, due to their higher financing growth and larger share of wholesale deposits.
"We expect strong labour market conditions and proactive restructuring and write-off policies among banks to help them maintain low non-performing loan (NPL) ratios," it said.
Tariff Direct Impact Remains Low
S&P Global expects the direct impact of higher tariffs to be low as trade-related exposures are small at 3.5 per cent of total loans.
It said exposure to export-oriented SMEs with a significant presence in US markets is also limited.
However, SMEs will remain susceptible to higher tariffs and supply chain disruptions.
"We forecast a modest rise in NPLs of 20-25 basis points by end-2026 to 1.6 per cent, stemming from pressure on SMEs and low-income households. - Bernama
