However, policy uncertainty over new leadership may dampen sentiment.
Lending by Malaysian banks is poised to expand at a faster pace by clocking in between 6-7% in 2018 on the back of stronger economic conditions, according to credit rating agency Moody’s.
“Operating conditions for Malaysian banks will be stable over the next 12-18 months, supported by robust global economic growth, a recovery in global commodity prices and the continued resilience of domestic demand,” the report noted.
The economy is currently on strong footing amidst robust private consumption levels and stable employment conditions. Overall export growth also zoomed from 1.2% in 2016 to 18.9% in 2017 on the back of an up-cycle in electronics, commodity exports and oil and gas exports.
The formation of new bad loans is also expected to remain slow as corporate profit continues to improve and growth in risky household loans ease, signifying the gradual stabilisation of asset quality.
However, uncertainty over the new government’s policy direction is likely to weigh in on business and investor sentiment following the surprise victory of opposition coalition Pakatan Harapan helmed by Mahathir Mohamad in the country's fourteenth general elections.
“Post-GE14 macro policy uncertainty could have a slight dampening effect on the banking sector’s growth. As such, we believe the sector is unlikely to chart the same degree of outperformance prior to GE14,” UOB analyst Keith Wee Teck Keong said in an earlier report.
With Mahathir delivering his campaign promise of abolishing the GST and announcing the reintroduction of fuel subsidies, Moody’s fears that these plans would be credit negative for the sovereign without adequate offsetting measures in place.
“As such, businesses are likely to postpone their capital expenditure and expansion plans to later in the second half of 2018 as they wait for more clarity around the extent of policy changes by the new government,” the credit rating agency forecasted.
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