Malaysian banks to sustain profits despite slower loan growth

S&P expects loan growth to slow to 4%-5% over the next two years.

Malaysia’s banking sector is facing a dip in credit demand and slower loan growth over the next two years but should be able to sustain good profitability.

"We expect a dip in credit demand, resulting in slower loan growth of 4%-5% over the next two years," said S&P Global Ratings credit analyst Nikita Anand.

Corporate sector loan growth will be tempered by tough external conditions and some refinancing demand being mopped up by the bond markets, where rates are lower, the ratings agency said.

In contrast, retail loan growth should stay robust thanks to low unemployment rate and rising wages.

Overall, however, Malaysian banks are in strong shape to manage external risks thanks to their adequate capital buffers and loan loss coverage, S&P said.

Banks are expected to sustain good profitability over the next two years.

“We forecast return on assets to stay stable at about 1.4%, although risks are firmly on the downside. The impact of the recent rate cut will be broadly offset by a lower reserve requirement ratio and banks' active management of funding costs, in our view,” it said,

Banks’ active management of funding costs will counter the impact of heightened competition for loans and deposits, said Anand, although strength of retail deposit franchise will be a key differentiator.

Malaysian banks' retail-oriented loan portfolio limits the direct impact from higher tariffs, according to S&P.

“However, some small businesses and low-income households could come under pressure,” the report warned.