The banking sector is expected to see a slowing of its growth momentum, albeit moderately, in the second half of this year as it could be impacted by the global economic uncertainties like the ongoing sovereign debt crisis in Europe and the raising of the US debt ceiling, analysts said.
Analysts and industry observers said credit expansion would be sustained throughout the remaining months and much would be dependent, for example, on how fast the Government’s projects under the Economic Transformation Programme (ETP) kicks off, and the 10th Malaysia Plan.
Analysts are projecting loan growth this year to be in the region of 11% to 15%. The banking system’s total loan growth for the first six months to June stood at about 7% unannualised.
OCBC Bank (M) Bhd economist Gundy Cahyadi told StarBiz that although Malaysia’s economic expansion would continue to mean a good year for the banking sector, its performance might not be as robust as witnessed in the first half of this year, especially in the first quarter, at which point both the return on assets and return on equity hit recent highs.
“The central bank’s move to bring the SRR (statutory reserve requirement – interest free deposits banks have to keep with the central bank) back to the pre-crisis level will undeniably have an impact on banks’ profitability, given its impact on liquidity. We are also seeing some moderation starting to finally hit mortgage growth, which is typically one of the more profitable segments of commercial bank lending,’’ he noted.
Gundy said the unpredictable global market conditions would weigh on the banking sector even if real economic expansion soldiers on.
Bank Negara recently raised the SRR to 4% from 3% to mop up excess liquidity in the financial system.
Analysts and economists view the 100 basis point increase in SRR as normalising it to the SRR in the pre-2009 financial crisis level of 4%. It was maintained at this level from September 1998 to November 2008.
RAM Ratings head of financial institution ratings Promod Dass said the outlook on the Malaysian banking sector was still stable. He said the industry parameters which the rating agency was keeping close tabs on like asset quality, capitalisation as well as liquidity and funding positions were still within expectations.
RAM Ratings, he added, was projecting an 11% loan growth and an industry gross impaired-loan ratio of around 3% for 2011. Dass said, however, the rating agency remained vigilant over the potential weaker global economic growth stemming from the on-going sovereign debt saga in Europe and the US$2.4 trillion cut in US public spending following the recent deal approved by the US Congress to raise the debt ceiling.
These factors, he added could dampen Malaysia’s economic growth and its banking system’s loan growth for the second half of the year.
Malaysian Rating Corp Bhd vice-president and head of financial institution ratings Anandakumar Jegarasasingam said he expected loan growth for the whole year to be around 12%.
As for asset quality, he said a major weakening was not expected in the near term and capital ratios were expected to be broadly intact as well.
Should the weak external conditions persist for an extended period, he said it might eventually have a bearing on the banking sector’s growth prospects and asset quality.
The risk-weighted capital ratio and net- impaired loans ratio of the banking industry were 13.9% and 2% respectively year-on-year in June, which analysts consider healthy.
HwangDBS Vickers senior banking analyst Lim Sue Lin said loan growth would drive bank earnings and expected loan growth for the year to be around 15%.
“Based on the positive traction so far, mortgage and working capital loans, which comprise 27% and 26% of total industry loans, will be key drivers of loan growth this year,’’ she noted.
Ernst & Young Malaysia partner, assurance (financial services) Chan Hooi Lam said that apart from global economic uncertainties, he was upbeat about the banking sector. He attributed this, among others, to improvement in loan impairment, a well-capitalised banking system and stronger deposit base.