PETALING JAYA: The Malaysian banking sector as a bellwether of the economy is expected to see improvement in loan growth of between 4% and 5% in 2024, with consumer loans outpacing business loans amid external uncertainties.

Industry experts said in spite of lingering uncertainties next year due to the anticipated slower global economic growth, China’s economy losing steam and higher interest rates impacting business activities and consumption, the local banking sector is poised to weather these challenges and register a relatively healthy loan growth.

Their prognosis is based on the growth of the local economy, robust labour market, strong domestic demand, government’s initiatives a well capitalised banking system and healthy provisioning reserves.

Most analysts are forecasting the banking system’s loan growth for this year to be around 4% compared with 5.7% growth in 2022.

AMMB Holdings Bhd group chief executive officer Datuk Sulaiman Mohd Tahir is upbeat about the banking sector next year.

Speaking to StarBiz he said: “With the worst of the Covid-19 pandemic behind us as of late 2021, the economic momentum gained in 2022 is set to propel us beyond 2023. As for the remainder of the year, we are optimistic of the sector’s growth. “

Key growth drivers for the sector for the remainder of the year and in 2024 include strong domestic demand, an uptick in employment rates and wage growth, he noted.

Moreover, Sulaiman said the tourism sector and multi-year infrastructure projects, underpinned by initiatives like the New Industrial Master Plan 2030, are set to be significant boosters.

While challenges inevitably exist, he said Malaysia is well-equipped to tackle them, even with the external demand fluctuations.

Sulaiman is encouraged by the prospect of loan growth closely tracking gross domestic product (GDP) growth.

With slower external demand, economists are forecasting the economy to grow closer to the lower-end of Bank Negara’s official guidance of 4% to 5% this year, as well as expect 3% to 4% growth for 2024.

“As we move into the second half of 2023, we are particularly optimistic about a robust upswing in business loans.

“We also foresee a steady and reliable pace of growth in consumer or retail loans, contributing to a well-rounded, positive outlook for the industry as a whole,” he added.

RAM co-head of Financial Institution Ratings Wong Yin Ching.

RAM Ratings co-head of financial institution ratings Wong Yin Ching said that for next year, she expected loan expansion of about 4%, underscored by the GDP growth expectation of 4.5% to 5.5% against 4% to 5% for this year.

She said household loans would likely remain as the key driver, supported by robust labour market conditions.

“RAM Ratings believe the domestic banking system’s strong fundamentals will continue to anchor its resilience although downside risks to growth have heightened,” Wong said.

For the first seven months of 2023, the industry charted a tepid 2.7% annualised loan expansion amid softer global trade, tighter monetary policy conditions and cost pressures.

Credit demand was also affected by high base effects and dissipating post-pandemic pent-up spending.

Wong expected the local banking system’s sturdy asset quality to stay intact. As at end-July 2023, gross impaired loan (GIL) ratio stood at 1.76%.

“While we envisage loan delinquencies to creep up in the coming quarters, they are unlikely to nudge the GIL ratio beyond 2% this year and next.”

He said banks are also well capitalised and boast healthy provisioning reserves, having built up strong buffers during the pandemic.

“Some of these provisions may be released but most will likely be retained due to prevailing uncertainties.

“Average credit cost ratio is projected to close the year at 25 basis points (bps) and slightly lower at 20 to 25 bps in 2024,” Wong said.

UCSI University Malaysia assistant professor of finance Liew Chee Yoongv

Spelling out the banking sector’s outlook for next year, UCSI University Malaysia assistant professor of finance Liew Chee Yoong said the sector’s prospects for 2024 would largely depend on various factors.

These include the overall economic environment, external demand and how well the banks adapt to potential economic challenges due to the spillover effects from a possible slowdown of the global economy.

Besides this, he said the possibility of a major recession in China as a result of the financial distress suffered by the country’s property sector would have an impact on the local banking sector.

Liew, who is also a research fellow at the Centre for Market Education, anticipated SME loans to grow at a faster rate this year and consumer loans to grow faster in 2024.

In terms of net interest margin (NIM), he expected compression in NIM in the banking sector to continue in 2024.

“This is due to stiff competition for deposits which exert pressure on NIM as well as the expectations that interest rates may remain unchanged or it may increase if the US Federal Reserve decides to increase the federal fund rate next year, “ Liew said.

NIM is a measure of the difference between the interest income generated by banks and interest paid out to depositors. A wider NIM indicates higher earnings for banks.

Sulaiman, however, said there are signs of moderation in NIM compression across the banking sector and anticipated this positive trend to persist next year.

As for the overnight policy rate (OPR), he anticipated a stable environment moving forward.

“AmBank is also proactively prepared for any increase in deposit competition, which traditionally tends to peak towards the end of the year,” he added.

At its latest monetary policy committee meeting, Bank Negara left the OPR unchanged at 3%.

Meanwhile, Wong foresees banks to record a modest improvement in profit performance next year on account of marginally better loan growth and potentially lower provisions.

She said NIM may stay pressured, given ongoing deposit competition although this had eased somewhat.

Strong emphasis would be placed on boosting non-interest income (NII), which is capital-light, particularly wealth management and bancassurance products and services.

Wong said: “We expect banks to continue their efforts in enhancing cost efficiency through disciplined cost control and at the same time, aggressively pursuing their digitalisation agenda.

“While the upcoming new digital banks are not expected to pose immediate threat to incumbents, existing players are rapidly enhancing their digital offerings and investing in new capabilities to meet evolving customer needs and enhance productivity.”

As to whether NII would be a growth driver for banks in 2024, Liew said some large local banks have been focusing on increasing NII and this indicated a growing focus for some banks.

“Potential areas for strong growth in NII could include fees from digital banking services, wealth management, foreign exchange transactions and investment advisory services,” Liew noted.

Sulaiman said banks, including AmBank, are placing more emphasis on diversifying revenue streams.

“We are actively expanding our portfolio in NII, which not only offers capital-efficient avenues but also presents excellent growth prospects.

“In terms of specific areas, we are bullish on trading, investments, fee-based income and foreign exchange trading.

“As investor sentiment shows encouraging signs of improvement, we see a bright future in these areas,” he said.

CGS-CIMB Research in its recent report said banks’ loan growth would end 2023 at a rate closer to the lower end of the 4% to 5% range it had projected, and improve to growth around 5% in 2024.

This will be achieved on the back of brighter economic outlook arising from various initiatives by the government to improve Malaysia’s economic growth, it said.

Gross impaired loan ratio would peak at between 1.8% and 2% and hover around these levels in 2024, it added.

The research house said capital management by several banks could also lead to an increase in dividend payout ratios and expansion in return on equity over the longer term.