Malaysian banks still struggle with sluggish loan growth

Loans grew by just 3.8% in September amidst persistent weakness in business loans.

Malaysian banks’ loan portfolios remained at a muted pace with only a 3.8% YoY growth in September, slightly lower than the 3.9% YoY recorded in August, according to a report by UOB Kay Hian. Overall business loans remained a key drag on loan growth, expanding by only 2.7% in September compared to the 6.8% YoY growth in September 2018.

Meanwhile, household loan growth was stable at 4.6% in September, supported by residential property loans (+7.2%) to offset the 1.7% YoY contraction of auto loans.

Also read: Looming loan slowdown threatens Malaysian banks' 2019 earnings

Loan approval and application also contracted 8.7% YoY and 6.1% YoY, respectively, whilst loan approval growth moderating to 3.5% YoY in 9M 2019 from a 5.3% YoY loan approval growth in 9M 2018. The modest overall industry loans approval growth was largely driven by stronger residential property loans approvals (9M19: +10.6% YoY) as a result of the on-going home ownership scheme, noted UOB Kay Hian. This is only expected to filter down to a slight recovery in residential property loan growth toward H2 2020.

On a more positive note, the banks’ overall system deposits rose 6% YoY in September. However, fixed deposits registered fell 1.1% YoY although CASA expanded 6.5% YoY.

UOB Kay Hian analyst Keith Wee Teck Keong noted that the movement of deposits is in tandem with the easing in fixed deposit competition after the OPR cut, and should help partially alleviate system NIM compression. “That said, banks are still expecting NIM to slip by an average of 6bp in 2019 from the impact of the OPR cut,” he added.

Gross impaired loans (GIL) ratio was also “relatively stable,” remaining at1.61% in September. However, household GIL ratio deteriorated from 1.04% to 1.07% as the GIL ratio of the residential property segment edged upwards to 1.15% during the month. As a result, analyst Keong believes that the sector’s net credit cost should normalise upwards in H2 2019 to meet UOB’s full-year estimates of 25bp vs H1 2019 15bp.

This could place some pressure on H2 2019’s sector earnings but will be partially offset by the downward repricing of deposits in Q4 2019 if there are no further OPR cut for the rest of the year, noted Keong.

UOB Kay Hian maintained its year-end sector earnings forecast of -0.7% to 2.6% amidst slight comebacks from banks’ share prices, but noted that 9M 2019 sector loans growth has weakened further to 3.8%, which places further downside risk to 2019 loan growth.