INCREASE IN CORPORATE DEMAND MAY HELP PUSH MALAYSIAN BANKS' CREDIT GROWTH TO 6% - S&P GLOBAL

An increase in corporate demand, led by key infrastructure projects, may help push credit growth for Malaysian banks to 6% in 2024 from five% in 2023, said S&P Global Ratings.

Its South and Southeast Asia financial institutions ratings director Nikita Anand said the agency expects corporate loan growth to revive in 2024.

She said that corporate credit growth took a larger hit than retail in 2023, as some working capital loan demands slowed down in certain sectors, such as construction, manufacturing and trade.

“For some of the larger loans, we saw that corporates turned to the bond market, given that the bond spreads have narrowed significantly for high-quality issuers. This is reflected in the slower loan growth of 4% on the corporate side in 2023.

“In 2024, with the authorities set to implement some key infrastructure projects, especially transport-related, we believe that will have a follow-on impact on some of the other related sectors as well, which benefit from an infrastructure pickup. That should reflect in better corporate credit growth in 2024 and 2025,” Nikita said during a webinar themed “Key Credit Risks For Malaysian Banks and Economic Outlook”.

However, she noted that corporate loans would still be lower than the retail or the household sector which usually drives the loan growth in Malaysia.

“So, we are expecting a 6% growth in that portfolio, whereas for corporates, the growth is expected to be close to 5% from 4% last year,” Nikita said.

She also pointed out that strong labour market conditions and a proactive write-off policy should continue to help Malaysian banks maintain low non-performing loan (NPL) ratios.

The rating agency expects a moderate 25 to 30 basis points rise in NPLs which could come from restructured loans remaining manageable at 2.4%, especially from low-income households and small to midsize enterprises.

As for Malaysia's economic growth, she said it is likely to improve slightly over the next two years. A slowdown in China will be partly offset by improving global trade performance and stable domestic demand.

“We are forecasting gross domestic product (GDP) growth of 4.3% in 2024 and 4.5% in 2025, compared with 3.7% in 2023, and this should support credit demand,” Nikita said.

She also shared that Malaysian corporate debt-to-GDP is about 70%, which is comparable to the Asian region.

Corporate balance sheets are generally robust, notwithstanding some decline in profitability in 2023, due to elevated overnight policy rates (OPR).

“This trend could continue in 2024. However, we do expect that overall corporate sector metrics should stay healthy, especially debt-to-equity ratio and interest coverage, both of which were at healthy levels in 2023.

“This should all support corporate sector credit quality over the next one to two years,” Nikita said.

On to the household sector, S&P Global noted some structural risks here because of the high household leverage of over 80% of GDP and relatively low per capita income of US$12,000 (US$1=RM4.740).

Nikita believes that the asset quality risks in this sector are mitigated by a few factors, among them are the stable labour market conditions in Malaysia and a steady OPR rate at 3%, a level which is similar to pre-pandemic levels.

She also said that Malaysian banks have historically maintained excellent asset quality among peers, and over the next couple of years, this trend will continue.

“We believe funding and liquidity conditions should stabilise. However, in 2023, we saw a sharp decline in margins. This was driven by the upward repricing of term deposits and intense deposit rate competition.

“Malaysian banks have higher shares of term deposits than many other markets in the region. Hence, the repricing of term deposits weighed heavily on margins, which contracted by 20 basis points during 2023,” Nikita said.

Nonetheless, S&P Global saw that deposit price competition has subsided and the fixed deposit rates appear to have peaked, she said.

On profitability, Nikita said there are limited upsides for Malaysian banks over the next two years as the rating agency saw another 3 or 5 basis points compression in margins that are likely in 2024.