‘Calculated risk’ approach taken in lending

This article first appeared in The Edge Financial Daily, on April 2, 2018.
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KUALA LUMPUR: Most banks missed their loan growth targets last year, yet they are in no rush to ease their lending policies anytime soon, preferring to focus on credit quality. Indeed, the cautious stance taken by some banks suggests that they may have tightened their lending conditions.

According to several major banks The Edge Financial Daily spoke to, they have not imposed stricter lending conditions except for certain sectors.

For CIMB Group Holdings Bhd, its current house view is cautious for commercial property and oil and gas (O&G) industries, said its group chief executive officer (CEO) Tengku Datuk Seri Zafrul Aziz.

“The bank has risk appetite approved by the board of directors giving general guidance on the various sectors’ exposure. Some sectors will have more limits than others, but lending is in the business of calculated risk-taking in order to achieve an acceptable return to our shareholders,” he told The Edge Financial Daily.

He added that CIMB’s lending policy is typically risk-based where the reasonableness of assumptions used, the market outlook for the industry and viability of a business are analysed when evaluating a potential loan.

AMMB Holdings Bhd (AmBank Group) echoed the same sentiments on credit policy.

“It’s not about reducing loans; it’s about ensuring our risk criteria are not neglected. We are open to providing loans to industry players so long as it fulfils our risk criteria. Understanding risk is key to business growth,” said AmBank Group group CEO Datuk Sulaiman Mohd Tahir.

Sulaiman said as part of the process, the bank looks at various factors and performs a credit assessment and approval based on its approved credit policies and lending criteria.

“The group also adopts risk mitigation via differentiated pricing or enhanced security requirements for higher-risk segments or customers,” he added.

AmBank Research senior vice-president of domestic equity Kevin Ong said banks are selective in lending to the real estate as well as the O&G sector as there are still “some pockets of vulnerability from banks’ existing exposure to these two segments”.

RHB Bank Bhd said it doesn’t have a blanket restriction across sectors.

“At different points of the economic cycle, there may be specific segments or sectors which will face heightened challenges, and as a responsible lender, we will take such challenges into account as part of our credit underwriting process. And we look at individual credit on its own merit, regardless of sectors,” its group managing director Datuk Khairussaleh Ramli said via email.

The Association of Banks in Malaysia said in a statement dated March 23 it is not in member banks’ interest to delay the disbursement of loans as it lengthens the processing time, leading to inefficiencies and jeopardising the relationship with their customers.

“Moreover, from a revenue perspective, banks would not be able to recognise any income from the loans until the funds have been disbursed to their customers,” it added.


Banks remain upbeat on loan growth in 2018

Top bank executives in Malaysia are feeling more upbeat about their prospects this year, with much of the loan growth to be driven by the corporate sector.

The local economy expanded 5.9% in 2017, up from 4.2% in 2016. This year, gross domestic product (GDP) is seen growing at a faster clip of 5.5% to 6%.

In February, Malayan Banking Bhd (Maybank) group president and CEO Datuk Abdul Farid Alias attributed the shortfall in the group’s 2017 loan growth to corporate companies preferring to raise funds from the bond market rather than the loan market due to lower rates.

For RHB Bank’s Khairussaleh, he is of the view that bank loans and capital fundraising can be seen as complementary in meeting corporate funding requirements, adding that “there is certainly room” for both to grow, going forward.

“For example, certain corporate funding needs may require bank loans to bridge, while capital markets can help fulfil the longer-term funding requirements,” he said.

AmBank Group’s Sulaiman concurred, saying that stronger capital market activities are positive for banks in terms of debt and equity fee income, as well as their trading activities.

“At the same time, we see demand for bank loans driven by small and medium enterprises, as well as the mid-corporate segment and funding for merger and acquisition transactions such as bridging financing,” he said.

According to the Securities Commission Malaysia’s (SC) latest annual report 2017, domestic capital fundraising is expected to remain strong at around RM120 billion this year, exceeding the five-year average of RM114 billion.

Total outstanding financing by banks, meanwhile, grew at a moderate pace of 4.1% last year, from 5.3% in 2016, said Bank Negara Malaysia (BNM) in its 2017 annual report.

“This reflected the slower growth of 1.8% in outstanding business sector financing, which offset the steady expansion in financing extended to households at 5.1%,” said BNM, adding that large businesses saw repayments outpace disbursements as stronger business earnings encouraged large businesses to pare down borrowings for working capital.

UOB Malaysia senior vice-president of global economics and market research Julia Goh opined that the subdued loan growth in 2017 may be due to easing of residential loan growth, owing to slower gains in house prices.

“Given that last year started on a more cautious note, particularly post-US election, some businesses may have also opted for less gearing and pared down their debt,” she added.

Nomura vice-president of equity research Tushar Mohota said there could also be “a time lag between GDP and related sentiment improvement translating into loan growth”.

He opined that this year’s loan growth targets look much more achievable at mid-single digits. “We expect loan growth to improve to 5% for the system in 2018, rising from 4.1% in 2017,” he added.

MIDF Research senior analyst Imran Yassin Yusof believes the robust GDP growth in 2017 “will spill over onto loan growth in 2018”, expecting banks to record better loan growth this year.

Maybank, the country’s largest lender by assets, is targeting a loan growth of 4% this year, similar to that achieved last year.

CIMB has kept its loan growth target at 7% this year, similar to last year, despite falling short of 0.2% in 2017.

Public Bank Bhd and RHB Bank are aiming for a loan growth of 5% and 6% respectively in 2018, after achieving 3.6% and 3.7% respectively in 2017.


‘OPR hike will not dampen lending’

Banks and economists do not expect a potential hike of 25 basis points (bps) in overnight policy rate (OPR) to have a significant impact on banks’ loan growth.

“A 25bps hike in OPR to 3.5% is not expected to negatively impact loan growth,” said Sulaiman, noting that the interest rate policy is generally viewed to be at an accommodative level to support growth and to keep in line with inflationary pressure.

“We do not expect any pressure on the asset quality of banks nor cause for non-performing loans to rise should the policy rate be normalised at 3.5%, supported by overall healthy macro fundamentals,” he added.

RHB Bank’s Khairussaleh said it is possible for the central bank to raise the OPR by another 25bps in the second half of the year (2H18), but much will depend on external factors.

“We expect the broader economy to remain healthy, based on BNM’s stronger GDP growth forecast of 5.5% to 6%, and this would still provide a positive environment for bank lending,” he added.

Socio-Economic Research Centre executive director Lee Heng Guie concurred, adding that the cost of borrowing is still reasonable while investment projects remain profitable.

“For households, higher interest rates will cost a little bit more for property mortgages, but probably not enough to change many decisions such as to buy affordable homes,” he said.

Nomura’s Tushar believes the interest rate normalisation is already happening and hence, he doesn’t see another hike in OPR this year and in 2019.

He said the window for further rate hikes is closing on anticipation that the 14th general election will be called in late April or early May, as well as a fiscal tightening in 2H18.

“At 3.25%, the OPR is already one notch below the 3.5% level seen just prior to the global financial crisis. Furthermore, we forecast GDP growth to moderate to a still-solid 5.5% this year,” said Tushar.