This article first appeared in The Edge Financial Daily on September 24, 2018

KUALA LUMPUR: Banks missed their loan growth targets last year. This is likely to repeat this year even though most banks have already lowered their targets.

The continued deceleration of loan growth does not paint a good picture of the banks’ prospects although their earnings have matched analysts’ expectations so far, thanks to the drop in provision for non-performing loans (NPLs).

The rule of thumb is that banks are proxy to economic growth. According to Bank Negara Malaysia (BNM), gross domestic product (GDP) growth is expected to slow down to 5% this year from 5.9% last year, so banks’ earnings may not grow as strong in 2018.

Analysts contacted by The Edge Financial Daily concurred that the weaker loan growth is mainly due to uncertainties over government policies, deferment or cancellation of mega infrastructure projects, in addition to slower GDP growth.

Businesses are taking a wait-and-see stance awaiting more clarity on the market before they make any major decisions, such as capacity expansions, said Public Investment Bank head of research Ching Weng Jin.

“Things are actually still quite cautious in terms of borrowing activities. There are some signs of pickup here and there, but when we talk about the loan growth for the whole industry, there may be a bit of a challenge. Certain banks may meet their targets, but we don’t think everybody is going to make it,” he said over the phone.

Ching noted that most of the loan growth targets were set before the 14th general election, which resulted in a change in federal government and a deviation of public policies from the regime under the Barisan Nasional coalition.

“A lot of them (banks) are still optimistic, they have not changed their targets, but we think there may be a bit of a challenge, especially for those who are more domestically focused,” said Ching.

Last month, Malayan Banking Bhd (Maybank) chief financial officer Datuk Amirul Feisal Wan Zahir said the country’s largest lender was expected to outperform the industry in terms of annual loan growth this year, largely driven by its consumer and small businesses segment. However, activities in the investment banking and corporate sector were expected to remain slow.

For the second financial quarter ended June 30, 2018, Maybank’s gross loan grew at 4.6% year-on-year, driven by both community financial services and global banking segments.

Maybank targeted a loan growth of 4% for financial year 2018 (FY18) ending Dec 31, 2018, a faster pace compared with 1.7% in FY17, when the bank missed both the initial target of 6% to 7% and the revised target of 3%.

RHB Bank Bhd, on the other hand, has revised its gross loan growth target downwards to 3% to 4% this year, from an earlier estimate of 6%. The banking group achieved a gross loan growth of 3.1% for the first half of FY18.

The group’s managing director Datuk Khairussaleh Ramli said the lower-than-expected growth was due to billion ringgit of substantial repayments by large corporations, which was in line with RHB’s strategy to diverse its customer base to have more mid-cap clients.

In a note to investors dated Sept 14, CIMB Research analyst Winson Ng said industry loan growth was expected to remain strong until August this year thanks to zero-rating of the goods and services tax, which boosted car sales and narrowed the contraction in auto loans.

“However, auto sales could taper off in September when the government implements the sales and services tax. Hence, we think that loan growth could trend downwards from September to end-December 2018,” said Ng.

Another analyst, who declined to be named, was more cautious in saying that he expected less than a handful of Malaysian banks would be able to meet their initial gross loan growth targets as non-household loan declined in the second half of 2018 after several deferment of mega infrastructure projects.

“Growth in household loan seems okay so far, but we don’t think it is enough to offset the reduction in non-household segment,” he noted.

Nevertheless, Public Investment Bank’s Ching said banks’ earnings will be underpinned by their cost-saving initiatives and stable asset quality.

“The growth would still be there, a lot of them (banks) are having certain cost-saving initiatives, bringing their cost-to-income ratio down, so as long as their credit cost does not go out of control, and we do not think BNM is going to be raising rate anytime soon, the situation is quite manageable,” he said.

“We don’t expect there will be a huge provision hit to the banks’ earnings.

“In terms of top line growth, it may not be as fast, because loan growth is not that strong. It (loan growth) is sluggish, but we think it is still manageable, we don’t think it is a situation that we should be overly concerned about,” he added.

In a report dated Sept 5, Maybank Research analyst Desmond Ch’ng said since the implementation of Malaysian Financial Reporting Standards 9 this year, the impact on credit cost has been “fairly subdued”.

“We have generally assumed stable to slightly rising credit costs over the next two years, given our assumption of a general uptick in NPL ratios.

“For the banks in our coverage, we have conservatively factored in an uptick in GIL (gross impaired loan) ratios over the next two years, amid prevailing uncertainties on the global front, and amid potentially slower domestic economic growth ahead,” he said.