As the Malaysian economy continues to recover in 2023, the country’s banking sector is expected to benefit from an increased demand for financing, although rising interest rates could hamper demand, a new report has concluded.
According to a banking sector update from TA Research, momentum in domestic economic activities remains strong, stimulating demand for financial services.
“We continue to foresee earnings in 2023 to be supported by more robust year-on-year loan growth, a rising interest rate environment, a healthier asset quality outlook as borrowers under a targeted repayment assistance resume repayment, resumption of dividend pay-outs and ample capital and liquidity reserves in the banking system,” the analyst said in a report to clients.
“Potential downside risks in 2023 include uncertainty surrounding the ongoing geopolitical tensions, rising competition, the impact of growing inflationary pressures, and rising interest rates posing challenges for the sector.”
It added: “We foresee demand for financing to remain buoyant in 2023. We also anticipate that banks may be more willing to boost financing activities now that the macroeconomic outlook has improved, asset quality risks are mild, and the system is flush with capital and liquidity.”
For 2023, TA Research said it is expecting a stronger loan growth of 6.7%, underpinned by an increase of 6.5% and 7.1% for consumer and business loans.
“We project net interest income to grow by 3.4% in 2023 and contributions from Islamic banking operations to rise faster by 8.4%.
“The increases will be underpinned by prospects of healthier loan/financing growth and slight expansion in net interest margin (NIM). Despite opportunities for wider margins due to further policy rate hikes, we reiterate that banks will restart competition for loans while competition for deposits remains intense, thus putting some pressure on NIM expansion,” it said.
Annual business loan applications and approvals continued to rise substantially, rebounding from a fall-off in 2020 and first half of 2021. “Business loans are on an upward trajectory, indicating improved growth for the segment over the next six to 12 months.
“Additionally, corporate loan approval rates broadened to an average rate of 60% in October 2022, versus 48% in 2021 and 46% in 2020. Meanwhile, the approval rates for consumer loans also widened to 45% in October 2022 from 40% a year ago and 41% in 2020.
“Banks may be more willing to boost financing activities now that the macroeconomic outlook has improved, asset quality risks are mild, and the system is flush with capital and liquidity,” the analyst said.
Healthy approval rate for mortgages
“We note that the approval rate for residential mortgages remains healthy, growing to 41% in October 2022 from 37% a year ago, in tandem with property sales which increased by 40% in 3Q22.
“Nonetheless, mortgages have some downside risk, evidenced by recent weaker sequential sales performance. We note that in addition to the absence of the HOC, developers have slowed the pace of their new launches, as they require more time to assess the effect of labour shortages, rising raw material costs, and increasing financing costs.”
TA Research also said asset quality outlook has improved on the back of the reopening of the economy and resumption of business activities. “Despite widespread concerns, asset quality in the banking sector remained largely in check, although there has been some manageable increase in impaired loans in the system.
“Furthermore, banks under our coverage have built up management overlays amounting to around RM8 billion since the pandemic. While most banks would adopt a wait-and-see approach before writing back on these chunky provisions, we foresee room for some release towards the second half of 2023.”