Banking sector’s loan growth likely to remain flat: RAM Ratings

PETALING JAYA: RAM Ratings, which has reaffirmed the stable outlook on the Malaysian banking sector, said the sector’s loan growth is likely to remain flat at 5%-6% this year.
“The sector wrapped up a difficult 2016 in good shape, and we expect the same this year,” it said in a statement yesterday.
The rating agency said its view was underpinned by detailed reviews of close to 50 local banks and non-bank financial institutions in its rating universe in the past year.
“Our key expectations for 2017 include the following: flat loan growth of 5%-6%; asset quality to hold up well; sturdy capital buffers; healthy liquidity amid a sensitive funding environment; and earnings to remain pressured but sound,” it added.
RAM Ratings said although the economy is poised for a delicate recovery in 2017 with a GDP growth forecast of 4.5% this year, it does not foresee a broad-based improvement in economic sentiment.
However, it noted that the banking system’s asset-quality indicators have held up well. Gross impaired-loan (GIL) ratio remained at a historical low of 1.6% as at end-January 2017, despite pressures on certain sectors such as those related to automotive, oil and gas, steel and property development.
“The GIL ratio could increase to 1.8% if such pressure persists. That said, there is little evidence of widespread fragility,” RAM’s co-head of Financial Institution Ratings Wong Yin Ching said.
Based on the institution’s analysis of over 700 listed non-financial companies, Wong said the overall debt-servicing ability of Malaysian corporates has remained healthy despite declining profitability.
She said the credit quality of household loans is also expected to remain strong, supported by a benign economic environment and banks’ generally prudent underwriting standards for this sector.
“Residential property mortgages – the mainstay of household loans –continue to display solid asset-quality indicators,” she added.
In addition, RAM’s co-head of Financial Institution Ratings Sophia Lee said while signs of weakness have surfaced for unsecured consumer loans amid the elevated level of retrenchments and spiralling cost of living, the institution does not expect further deterioration to be significant, taking into consideration the current accommodative interest rates and contained unemployment conditions.
As at end-January 2017, the household sector’s GIL ratio remained low at 1.1%.
RAM Ratings said amid weaker corporate earnings, competition from non-bank deposit-taking institutions and capital outflows, the banking system’s adjusted loans-to-deposits ratio (including investment accounts) had tightened to 87.2% as at end-January 2017.
Lee highlighted that the ratio will stay elevated, adding competition for deposits is likely to stay keen as the funding environment remains highly sensitive to shifts in global sentiment.
“Banks are emphasising stronger liquidity buffers in the uncertain economic landscape,” she added.
Furthermore, RAM Ratings said the banking system’s liquidity position has kept healthy, however, as underlined by its monthly average Basel III liquidity coverage ratio of 124% since the inception of the requirement in June 2015.
“Given the expectation of a potential increase in credit costs and unrelenting competition putting a lid on net interest margins, banks’ earnings are envisaged to remain pressured this year.
Nonetheless, the rating agency said the Malaysian banking system is still well-capitalised, with respective common-equity tier-1 capital and total capital ratios of 13.1% and 16.9% as at end-January 2017.