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Banks to see flat loan growth this year, says RAM

The Edge logo The Edge 21/3/2017 Adam Aziz © Provided by The Edge

This article first appeared in The Edge Financial Daily, on March 21, 2017.

KUALA LUMPUR: RAM Rating Services Bhd expects the Malaysian banking sector to remain stable this year, with loan growth staying flattish at 5% to 6% compared with 5.3% in 2016.

In a statement yesterday, the rating agency said 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.

Its co-head of financial institution ratings Wong Yin Ching warned that the banking industry’s gross impaired-loan (GIL) ratio, a measure of the quality of the loans in the system, could increase to 1.8% if such pressure persists.

“That said, there is little evidence of widespread fragility,” she said in the statement.

The sector’s 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, especially smaller, cash-strapped players.

RAM also noted that 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.

Its view is underpinned by detailed reviews of close to 50 Malaysian banks and non-bank financial institutions in its rating universe in the past year.

Although the economy is poised for a delicate recovery in 2017, RAM does not foresee a broad-based improvement in economic sentiment. It is predicting the country’s gross domestic product growth to come in at 4.5% compared with 4.2% in 2016.

“Based on our analysis of over 700 listed non-financial companies, the overall debt-servicing ability of Malaysian corporates has remained healthy despite declining profitability.

“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,” said RAM.

“While signs of weakness have surfaced for unsecured consumer loans amid the elevated level of retrenchments and spiralling cost of living, we do not expect further deterioration to be significant, taking into consideration the current accommodative interest rates and contained unemployment conditions,” said RAM co-head of financial institution ratings Sophia Lee.

As at end-January 2017, the household sector’s GIL ratio remained low at 1.1%.

Amid weaker corporate earnings, RAM said competition from non-bank deposit-taking institutions and capital outflows, the banking system’s adjusted loan-to-deposit ratio, including investment accounts, had tightened to 87.2% as at end-January 2017 from 85.4% as at end-2015.

Lee is of the view that this ratio will stay elevated. “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.

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