RAM Ratings has maintained a stable outlook on the Malaysian banking sector in conjunction with the release of its latest commentary, Banking Insight: Staying the Course.
“Notwithstanding some lingering uncertainties over global economic conditions and fresh cost of living pressures from the rationalisation of subsidies, we expect banks to sustain their credit profiles this year,” says Wong Yin Ching, RAM’s Co-head of Financial Institution Ratings. “Although profitability outperformance would be challenging given keen competition, banks’ strong balance sheets with low levels of impaired loans, robust loss absorption buffers and diversified funding continue to support their fundamentals,” she adds.
Key expectations:
- Loan growth to moderate to around 5% in 2024 (2023: +5.3%), mainly due to softer demand for consumer loans.
- The banking system’s gross impaired loan (GIL) ratio to land between 1.6% and 1.7% by year end (end-2023: 1.65%). Potential write-offs of impaired exposures against excess provisions held by some banks will likely keep the ratio in check.
- Deposit competition though eased but remains elevated. Funding conditions however are still supportive of loan growth.
- Profit outperformance in 2024 to be limited, considering the difficult operating landscape and still-elevated cost pressures.
- Capital buffers will stay sturdy. Although Bank Negara Malaysia’s transitional arrangement – a regulatory forbearance – will cease this year, the industry’s capitalisation is expected to remain largely stable.
“The planned retargeting of subsidies in 2H 2024 and its execution is the biggest wild card for household loan expansion this year. Demand for loans may be held back by the possible squeeze on consumer disposable incomes and weaker spending sentiment. The negative impact is, however, is likely to be countered by business loans which will benefit from a rebound in exports and global trade,” Wong said. After a disappointing 8% y-o-y contraction in 2023, recent exports data is already showing promising signs of reversal, with January 2024 exports up 8.7% y-o-y after 10 prior consecutive monthly declines. We anticipate sustainable finance to gain further traction in the coming years. Banks have committed more than RM200 bil in financing for ESG purposes up to 2025 as the country endeavours to transition into a low carbon economy.
On the asset quality front, the average credit cost ratio of eight selected local banks rated by RAM Ratings improved to 23 bps in 2023 (2022: 30 bps). The ratio is envisaged to come in slightly lower this year at about 20 bps, considering that loan impairments will be largely contained and factoring in sizeable provision reserves still retained by banks. The banking system has robust loss absorption buffers – the GIL coverage (including regulatory reserves) of the eight banks was a solid 134% as at end-2023 compared to the pre-pandemic level of 107% as at end-2019. The industry’s common equity tier-1 capital ratio stayed sturdy at 14.6% on the same date.
“New dynamics in the banking sector brought on by three licensed domestic digital banks – including one Islamic digital bank – that became operational in the past year are also worth a close watch,” observes Sophia Lee, RAM’s Co-head of Financial Institution Ratings. GX Bank Berhad held the distinction of being the first to roll out the beta version of its digital application in September 2023, followed by Boost Bank Berhad and AEON Bank (M) Berhad early this year.
“For now, the product offerings of all three neobanks are limited to savings accounts, debit cards and reward schemes tied to partners within their respective ecosystems. It will be interesting to see if these challenger banks can gain traction beyond early adopters in these ecosystems and expand sustainably without incurring substantial acquisition costs, contain credit and technology risks and, most importantly, gain the loyalty of their captive audience,” adds Lee. We do not anticipate the neobanks to pose any threat to incumbent banks that are themselves investing heavily in digitalisation and improving user experience.
