The outlook for the local banking sector next year will be challenging amid the global economic uncertainties and analysts are expecting loan growth to hover between 6% and 9% compared with double-digit expansion this year.
For the first nine months of this year, the overall banking system loans grew by 10.1% compared with 9% in the same period last year. For the whole of last year, loan growth stood at 12.7%.
RAM Ratings head of financial institution ratings Wong Yin Ching said the agency maintained a stable outlook on the Malaysian banking sector for next year although it was growing more cautious.
“All things considered, we expect loan expansion to moderate in 2012 to probably high single digits. Our ongoing dialogues with banking players have also revealed that some banks are adopting a more cautionary stance towards lending. The deteriorating global growth prospects, exacerbated by the sovereign debt problems which remain unresolved in Europe as well as lingering concerns on the US economy, would likely have a dampening impact on Malaysia's economic growth.
“Nevertheless, our domestic banks will be entering this period of uncertainty and potentially more challenging economic environment from a position of strength. We believe the benign interest rate environment will persist into 2012, making the credit environment still accommodative for borrowers,” she told StarBiz.
On a more positive note, the roll-out of the Economic Transformation Programme (ETP) and the 10th Malaysia Plan would help fuel demand for loans from corporates as well as small and medium-scale enterprises (SMEs), although some of these financing needs could be channelled through the capital markets.
Malaysian Rating Corp Bhd vice-president and head of financial institutions ratings Anandakumar Jegarasasingam said from a credit rating perspective, the outlook for the sector was expected to be stable in 2012.
While the current global economic uncertainties would have an effect on the performance of the Malaysian economy, investor sentiment and investment activities were not expected to derail the sector as had been the case in Europe, he added.
David Chong, an analyst from RHB Research Institute, said he estimated loan growth this year to range between 11% and 12%, adding that he expected further slowdown for 2012 to about 8% to 9%.
Chong said while he believed loan growth for the business segment would likely slow down in the event of a downturn, it could be cushioned to an extent by the implementation of projects under the ETP.
Expressing his optimism on the sector, OCBC Bank (M) Bhd country chief risk officer Choo Yee Kwan said loan growth for banks in Malaysia could still be in the teens next year.
Loans to households, corporate lending/project financing, contract financing and financing to SMEs should still do well, he noted, adding that activities relating to treasury solutions and government bond issuance would still be active for 2012.
On Islamic financing, he said opportunities remained for it to make further headway in Malaysia's banking sector and to provide syariah-compliant products for individuals and enterprises.
Standard Chartered Bank Malaysia managing director and chief executive officer Osman Morad said the bank's loan growth next year was in line with the industry, which was expected to be in the range of 8% to 10%, adding that there were opportunities to capture market share in the SME and high value segments.
Osman said the banking system was well-capitalised, with a core capital ratio (CCR) of 12.5% as at September.
He said the sector had sufficient capital to support asset growth in the next one year and to resist possible stressed situations. He noted the capital level was also well above the regulatory minimum level under the current Basel II as well as the higher capital requirement under Basel III. The risk-weighted capital ratio (RWCR) for the period (September) stood at 14.6%.
For OCBC Bank, Choo said, as of last month, the bank's RWCR and CCR were above the industry figures and had set internal minimum prudential capital levels that were above the regulatory minimum level.
Considering the current market sentiments, banks were likely to strengthen their capital base through internal capital generation rather than raising fresh equity capital.
He observed that the total capital ratio for the sector was likely to be maintained above the 12% threshold in 2012. However, should economic conditions remained weak as banks tried to preserve their balance sheets as seen in 2009, the total capital ratio could edge higher past the 15% mark, he noted.
On impaired loans, Wong said the banking system's gross impaired loan (GIL) ratio a measure of the credit quality of the banks' loans by indicating the proportion of impaired loans to total loans was at a commendable 2.8% as at end-September, an all time low figure. This GIL ratio may inch higher next year but should still be within a healthy range, barring any unexpected shocks to the economy, she added.
She said reserves set aside for impaired loans provided a prudent coverage level of 96% for the period (September). The banking system's funding and liquidity positions were still deemed comfortable although the system's average loans-to-deposits ratio had been trending upwards, she noted.
Anandakumar expected a further squeeze in net interest margins (NIM) next year.
“Considering the current fragile economic conditions, the monetary authorities are likely to keep the overnight policy rate unchanged for the rest of the year, with rate cuts possible during the first quarter of 2012.
“The competitive pressure among the banks is likely to result in lower lending rates. In fact, the average lending rate of banks has been steadily declining over the past few quarters. At the same time, the competitive pressure would also push deposit rates up. And they would inevitably compress NIM,” he added.