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PETALING JAYA: Riding on the country’s economic recovery, RAM Rating Services Bhd projects loan growth for this year at between 4.5% and 5%.
In January this year, domestic loans growth came in at 4.7% year-on-year (y-o-y), driven by a pick-up in the pace of household loans and stronger momentum for working capital financing.
Credit demand saw a strong rebound in the fourth quarter last year as economic activity resumed following the unanticipated lockdown in June 2021.
Notwithstanding lingering asset quality headwinds and the risk of contagion from the Russia-Ukraine war, RAM’s co-head of financial institution ratings Wong Yin Ching said the rating agency was maintaining a stable outlook on the banking sector.
She said Malaysian banks had solid fundamentals and would continue to demonstrate resilience in 2022.
“We project loan growth to come in at 4.5% to 5% for 2022, which is similar or slightly higher than the 4.5% expansion in 2021.
“Our projection has taken into consideration the high base effect, given that a sizeable proportion of the system’s loans were under repayment moratorium or reduced instalments last year.
“Risks to growth, however, have tilted to the downside with still-evolving geopolitical tensions stemming from Russia and Ukraine.
“The conflict, depending on its magnitude and duration, could fuel global inflationary pressure, disrupt supply chains and dampen external demand,” Wong told StarBiz.
While repayment assistance is still ongoing, RAM said banks’ exposure has reduced considerably, given that a big portion of the relief under the Pemulih programme has expired in recent months.
Based on RAM’s eight selected local banks, the proportion of domestic loans under relief almost halved to an average 15% in January and February compared to the last quarter of 2021.
“Banks continued to build up management overlays in anticipation of higher defaults. These constituted a sizeable 43% of total provisioning charges last year based on the eight banks’ average,” said Sophia Lee, RAM’s co-head of financial institution ratings.
RAM estimates a credit cost ratio of around 40 basis points (bps) to 50bps in 2022.
“We expect impairment charges to moderate further, but it is too soon to see pre-pandemic levels in view of lingering downside risk. In the latest results briefings, banks also indicated they were in no haste to release accumulated management overlays,” said Lee.
The gross impaired loan or GIL coverage (including regulatory reserves) of the eight banks stood at a sturdier 129% as at end-2021 (end-2020: 117%). The industry’s capitalisation also remains solid, with the common equity tier-1 capital ratio standing at 15.2% for the period.
Banks’ profit performance rebounded strongly in 2021, thanks to lower provisioning expenses, broader net interest margins (NIMs) and significantly smaller modification charges.
However, Wong sees limited upside to banks’ earnings this year. Despite a potential rate hike in the second half of the year, banks’ NIM is envisaged to stay broadly stable as funding cost may be pressured by slower current and savings account deposit growth and potentially stiffer deposit competition, she said.
Bottom lines would also be hit by a one-off prosperity tax, RAM noted.
The rating agency expects banks’ funding and liquidity profiles to stay sound. Outpacing loan expansion, the banking system’s deposit growth accelerated to 5.9% in 2021 (2020: 3.9%), largely stemming from business enterprises.
On digital banking licences, RAM said the threat to incumbents in the immediate term would be limited, given the temporary asset threshold (less than RM3bil) and digital banks’ focus on the underserved and unserved markets.
Bank Negara is expected to award digital banking licences to five winning bidders this month. RAM would soon be releasing its annual Banking Insight, this year titled A Break in the Clouds.