PETALING JAYA: Loan growth is expected to post a slight recovery in 2020 on the back of positive outlooks for real estate, construction and working capital loans, as well as mortgages, according to a statement by Fitch Solutions.

The research unit said it is now forecasting a loan growth of 5% in 2020, from 4.3% previously.

“Our view for a slight recovery in loan growth in 2020 is supported by positive outlooks for mortgages, and real estate and working capital loans. Additionally, while our view for a significant pickup in construction loans has yet to play out, we hold to it still, remaining convinced that the resumption of large-scale, China-backed infrastructure projects will eventually feedthrough to the sector over the coming months,” it said in a statement.

Fitch Solutions said it expects a likely increase in foreign purchases of Malaysian homes in 2020 to lead to an increase in mortgages and real estate loans.

The minimum threshold for foreign buyers was lowered to RM600,000 from RM1 million previously, with effect from Jan 1 which should go some way to addressing the chronic oversupply of residential units, which numbered more than 54,000 in Q119, it noted.

“Not only is policy likely to lead to more applications for mortgages, but the likely reduction of inventory for developers could also jumpstart investment in more projects that they were likely putting off, which would require financing. Mortgages and real estate lending make up around 33% and 7% of total loans and grew by 7.3% and 1.3% in the 12 months to November 2019, respectively.”

At the same time, working capital loans are also likely to accelerate after the government clarified its stance on foreign investment, in particular Chinese investment.

Furthermore, the continued uncertainty around the trade conflict between the US and China is likely to see businesses continue to implement plans to diversify manufacturing operations away from China, especially in the lower segments of the value chain, which would benefit other economies in the region, including Malaysia.

Meanwhile, Fitch Solutions also revised its 2019 loan growth estimates downwards to 3.5% from 4.5% previously.

“Loan growth in the sector looks likely to underperform even our bearish 4.5% forecast in 2019, with loan growth coming in at 3.7% in the 12 months to November 2019. We had expected a pickup construction loans and a gentler slowdown in household loan growth to keep overall loan growth somewhat constant from 4.5% in the 12 months to May 2019.

“However, despite the resumption of large scale infrastructure projects such as the MYR44bn East Coast Rail Link, construction loan growth only picked up slightly to 3.5% in the 12 months to November 2019, from a low of 1.6% for the year until July 2019. Working capital loans similarly failed to post a significant growth uptick, and slowed to 1.3% growth for the year until November 2019,” it said.

Looking ahead to the rest of the year, Fitch Solutions said it still sees some downside pressure on asset quality following slowing economic growth over 2019, for which it expects real GDP growth of 4.6%, versus 5.8% in 2018.

“The effects of this slowdown on the economy is likely to continue feeding through to the banking system over the coming quarters,” it said.

The nonperforming loan (NPL) ratio for the commercial banking sector stood at 2.4% in Q319, holding steady from Q219. Working capital loans and mortgages make up the bulk of NPLs at around 31% and 25% of the total, respectively.

“That said, the sector remains well capitalised by international standards. The tier 1 capital ratio stands at 14.2% as of November 2019, well above the 8.0% required by Basel III standards. This coupled with the relatively low NPL ratio currently, suggests that financial stress is unlikely over the coming months,” Fitch Solutions concluded in its statement.