KUALA LUMPUR: S&P Global Ratings expects the Malaysian banking sector's loan growth to stay at 5 to 6 per cent in 2023 on the back of the country's economic stability which will support the creditworthiness of Malaysian businesses and consumers.

 

Malaysia's  Gross Domestic Product (GDP) is forecast to grow at 6.6 per cent in 2022 and an average of 4.5 per cent over the next three years, it said.

 

In the S&P Global Ratings' 2023 bank outlook commentaries released today, the research firm said that banks can also ride out rising asset quality risks as solid capitalisation and provisioning buffers could offset asset quality pressure.

 

Malaysian banks' solid capitalisation at 14.3 per cent common equity Tier-1 ratios as of June 30, 2022, and provisioning buffers of 1.8 per cent of total loans will help them to absorb a moderate rise in credit stress, it said.

 

 

However, it noted that asset quality is expected to deteriorate and the industry's non-performing loan (NPL) ratio will likely rise to 2.5 to 3.0 per cent over the next two years from 1.8 per cent as of end-June 2022 following the expiry of moratorium programmes.

 

''Loans to low-income households and small to midsize enterprises (SMEs) struggling to recover from the pandemic could be at risk. Higher inflation and interest rates are causing further pain. Banks' high provisioning buffers should also limit additional provisioning requirements despite rising NPLs.

 

"Meanwhile, credit costs will decline to 30 to 40 basis points (bps) but stay higher than pre-pandemic levels as banks are likely to stay cautious amid global headwinds," it said.

 

However, it said banks' earnings could edge closer to pre-pandemic levels starting in 2023, with higher margins, moderating credit costs and a normalised tax rate will drive the improvement.

 

"In our base case, we forecast return on average assets of 1.3 to 1.4 per cent, compared with 1.1 to 1.2 per cent estimated for 2022," it noted.

 

S&P Global also highlighted that property market risks should stay contained although oversupply issues in the real estate market remained a structural challenge.

 

"Nonetheless, modest growth in property prices in recent years, banks' prudent loan-to-value ratios and cautious lending to the commercial segment limit risk from this sector," it said.

 

Moving forward, it said over the next year, higher inflation and interest rates could dampen credit demand and increase default risks for some low-income consumers and SMEs.

 

"We view these risks as manageable. Although it is not our base case, a sharp rise in unemployment could also increase asset quality risks for the banking sector.

 

"Some new digital banks could launch operations in 2023. While we believe large banks will retain their market shares, it will be interesting to see how their business models evolve in response to the digital competition," it said.

 

Taking a bird's eye view of the global banking sector, it said 2023 will be more difficult for the banking sector. While the vast majority of bank ratings are stable, S&P Global anticipates the significant buffers that banks have built up over the past 10 years will be tested.

 

Net interest margins are fattening in many jurisdictions on the back of higher interest rates. This boost, along with still-sound asset quality and robust capitalization, continues to underpin the overall stable view across the global banking sector.

 

Another help is strong deposit bases buoyed by excess savings coming out of the COVID-19 pandemic, it said.

 

It also highlighted that inflation is at 40-year highs in some banking jurisdictions, and this is feeding into higher borrowing costs. Inflation is also putting the brakes on the outlook for economic growth.

 

The equation for banks could change on materially higher-for-longer inflation outside S&P Global's current base case, or a deeper or longer recession resulting in a sharper-than-anticipated contraction in growth and higher unemployment, it said.

 

"A key risk to bank ratings is the emergence of harsher economic and financing conditions than our base case. Additional key risks are potentially higher corporate insolvencies exacerbated by high corporate leverage, high government leverage, and weaker property sectors.

 

"We anticipate increasing credit divergence between the strong and weak. Challenges may be more acute and swift for non-bank financial institutions, and certain emerging market banks. Entities in countries most exposed to energy restrictions may also be challenged," it added. 

 

 - Bernama