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This article first appeared in The Edge Financial Daily on December 13, 2019

KUALA LUMPUR: The recent set of central bank data on loan growth in the banking sector for the month of October suggests a slowdown in lending momentum, which reflects a more cautious sentiment on economic growth.

Some banks have also trimmed their loan growth targets during the recently concluded quarterly earnings season. AMMB Holdings Bhd (AmBank), for one, has reduced its financial year 2020 (FY20) loan growth target to between 4% and 5%, from the 6% it set in May this year, while Alliance Bank Malaysia Bhd has revised it to between 5% and 7%, from 7% previously (see chart).

Bank Negara Malaysia’s (BNM) November announcement that the statutory reserve requirement (SRR) ratio would be reduced to 3% from 3.5% is said to bode well for the banking sector, as it is expected to provide more liquidity and release some RM7.35 billion into the banking system.

Ideally, with banks having more money in hand to lend out, it is expected to support loan growth and, ultimately, the overall domestic economy. The efficacy of this move remains to be seen, as demand for loans has not been robust so far.

According to BNM data, October’s annual growth in outstanding loans from the banking system moderated to 3.7% from 3.8% a month earlier, mainly due to lower growth in business loans.

Non-household loan growth decelerated further to 2.4% during the month, from September’s 2.7%, though household loan growth was stable at 4.7%, AmInvestment Bank wrote in a sector note on Dec 3. “Loan growth was slower in most segments except for the wholesale, retail, restaurants, hotels and education, and health, while the household sector showed a modest a pickup in lending,” it noted.

There was also a wider contraction in loan disbursements in October, a decline of 7.9% (September: -1.7%, August: 1%), due to slower drawdowns of household and non-household loans, AmInvestment Bank added.

 

‘Sentiment cautious while banks remain vigilant’

Sunway University Business School economics professor Dr Yeah Kim Leng observed that loan growth is easing as demand softens amid cautious consumer and investor sentiments.

“Despite ample liquidity, banks also remain vigilant over the materialisation of credit risks and some may have tightened lending criteria, especially to overexposed sectors such as property,” Yeah told The Edge Financial Daily.

Still, he believes lending opportunities remain aplenty for firms with good financial standing that are looking at acquisitions, capacity expansion and new ventures.

Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid acknowledged there is slower loan demand, adding that impaired loans have also risen. The gross impairment ratio has gone up, he said, albeit

moderately, from 1.48% in December 2018 to 1.62% in October, he noted.

According to BNM, moderation in demand for credit in recent years is in line with more moderate domestic economic activity amid weaker sentiments, prevailing uncertainties and heightened risks from the global environment.

“Structurally, growth in bank lending has stabilised to more moderate levels as compared to the strong credit growth during 2010-2014, a period of exuberant consumption credit and property-related lending. The gradual moderation in credit expansion partly reflects the outcome of a deliberate and measured policy strategy to manage risks from high household indebtedness and to curb excessive speculative activity in the Malaysian housing market.

“Since 2016, household personal financing and housing loans have been growing more in line with income at a pace of 3%-5% and 7%-9%, respectively, below their previous peaks of 20.5% and 13.4%,” BNM wrote in its Quarterly Bulletin for the third quarter of 2019.

On loan rejections, BNM said studies have found poor repayment track record, cash flow concerns and over-leveraging to be the primary factors for being rejected among households and SMEs.

“For housing loans, this stems from a broader issue of home affordability, which becomes readily apparent when 72% of rejected applications were for the purchase of homes that are either seriously or severely unaffordable relative to the applicant’s income level,” it said.

Nevertheless, BNM said banks remain willing to lend to bankable segments given that net interest incomes comprise the bulk of their gross income.

“On average, banks approve roughly three out of four housing loan applications they receive. In 2019 alone, this meant banks approved housing loans worth RM119 billion for about 273,000 borrowers, which is higher than the level of approvals seen in the past three years for the same period,” BNM said.

Looking ahead, Mohd Afzanizam said loans growth is expected to continue moderating in the region of 3% to 4% next year, as the general economy remains weak.

“Banks risk appetite going forward would be guarded as prospects for gross domestic product growth next year looks quite challenging in view of the ongoing trade war. Perhaps banks would focus on extending more fixed rate financing in the face of potential reduction in the overnight policy rate next year,” he said.

Similarly, Affin Hwang Capital Research thinks there will be continued slow down in loan growth. In a sector update note titled ‘Cautious times ahead’ that it released on Dec 10, it cut its banking sector core earnings forecasts by 1.3% for this year, 3.3% for 2020 and 3.9% for 2021, on anticipation of weaker loan growth in 2020 and 2021.

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