KUALA LUMPUR, March 1 (Reuters) – Malaysian banks will expand lending by 6.0 percent in 2022, compared to lending growth of 4.5 percent in 2021, S&P Global Ratings said.
In particular, credit analyst Nancy Duan said that higher capital spending, a booming oil and gas market and the competitive cost of financing bank loans amid capital market volatility will revive demand for credit from large companies.
“Consumer and small and medium-sized enterprise (SMEs) lending will take longer to recover due to still weak consumer confidence, the level of SME stress during Covid-19, higher inflation and already elevated household debt” , she said in a statement today.
Duan said Malaysian banks would face more downward pressure on net interest income (NIM) in the first half of 2022 as their funding costs start to rise and competition for deposits increases.
However, the NIM could stabilize in the second half as Bank Negara Malaysia is likely to hike its overnight interest rate by 25 basis points by June, meaning local banks will benefit from some improvement in loan yields, she predicted.
Duan reckons the local banking sector’s borrowing costs would not normalize to pre-Covid levels anytime soon, unlike its peers in Singapore.
In the meantime, she said, banks could start unwinding the accumulated provisioning buffer on unimpaired loans in the second half of 2022 once the dust from moratorium uncertainties has settled, and this could mitigate the need for additional provisioning despite rising non-performing loans (NPLs) significantly reduce.
More broadly, she said a rebound in earnings in 2021 doesn’t tell the whole story for Malaysian banks and uneven recovery of loans under the moratorium will continue to weigh this year.
“We are likely to significantly lower our 2022 borrowing cost forecast for the sector from the current 55-60 basis points if Malaysia’s economic recovery remains firm and the transition to an endemic phase proceeds as planned.”
Duan said at least two drivers of last year’s earnings jump are likely to remain the same: lower borrowing costs (a measure of provisions) and accelerating credit growth.
“However, the margin improvement of the past year is likely to have come to an end for the time being. And NPLs could rise to 2.5-3.0 percent over the next 12 months after various moratorium programs expire as planned by mid-2022. This compares to an NPL ratio of 1.4 percent in 2021.
“SME and low-income household borrowers are the most vulnerable segments under the credit facilitation programs offered by Malaysian banks. Lenders that have larger lending exposures to SMEs and mass-market consumer banking will lag behind those with established niches in affluent retail and large corporates in their recovery.
“We estimate that loans to SMEs and low-income households account for about 30 to 35 percent of the industry-wide loan book,” she added.
In addition, she said the government’s recently announced RM40 billion aid program, specifically targeting micro-enterprises, SMEs and the informal sector, would help ease the much-needed business recovery for small businesses. Still, this is unlikely to pre-empt the weaker underlying credit trend from these borrowers.
On the other hand, Duan noted that the sector’s high provisioning coverage for non-impaired loans of around 1.3 percent at the end of 2021 is positive for borrowing costs. This compares to the low pre-Covid-19 coverage of 0.8 per cent. – Bernama