System loans grew 5% year-on-year in March, with robust lending indicators paving the way for further growth in the months ahead. Despite market uncertainties, RHB Research (RHB) in the recent Malaysia Sector Update Report believes banks have sufficient levers in place to support earnings and dividend growth.
“Investors should adopt a defensive posture, and collect on dips the stocks with strong structural growth themes,” said RHB.
System loans added 5.0% year-on-year in March, with loans for working capital and residential mortgages being the key growth drivers.
“Loan growth among households and non-households stayed robust. We also saw month-on-month strength in loans to the real estate and finance sectors,” said RHB.
“With Bank Negara Malaysia expecting economic activity to be firm throughout the year, we maintain 2023 future system loan growth at 5% year-on-year,” said RHB.
System loan applications in March stood at RM134 billion, lifting the 3-month moving average to RM109.5 billion. This comes despite the slight rise in the average lending rate to 5.19% in March, and is positive for further loan growth in the coming months.
Feedback from banks suggests that demand for financing should remain sturdy along with economic growth, which leaves room for the banks to consider lifting lending rates further to cushion the net interest margin impact from intense deposit competition.
System deposits rose 7% year-on-year in March, outpacing loan growth during that period. As expected, depositors continued to shift from current account savings accounts to the more lucrative fixed deposits – the 12-month fixed deposit rate had risen almost 1 point year-on-year. The system current account savings account ratio dipped to 39.5% in March.
System gross impaired loans stayed flat month-on-month – uplifts in construction and manufacturing gross impaired loans were offset by lower household gross impaired loans.
Moving forward, the banks have guided for gross impaired loans to increase with the progressive exit of customers from repayment assistance programmes, but the banks have made sufficient provisions for such a scenario. System loan life coverage of 95.8% versus pre-pandemic average of less than 80% is still plenty, in RHB’s view.
Quarter-on-quarter, loans grew 1% against deposit growth of 2%, while gross impaired loans rose 2%. The Malaysian banking system stayed liquid and well capitalised in March against the backdrop of banking institution failures in the US and Europe – loan-to-deposit ratio and common equity tier-1 stood at 85% and 14.8%. Elsewhere, RHB economists expect Bank Negara Malaysia to maintain the overnight policy rate at 2.75% at the upcoming 3 May Monetary Policy Committee meeting. The peak overnight policy rate forecast is still at 3.25%, with the balance of risks tilted towards a print of 3.00%.
