KUALA LUMPUR (June 13): RAM Ratings today pointed to some downside risk to its 2019 year-on-year loan growth projection of 5% among Malaysian banks, taking into account the fifth consecutive month of slower growth in April.

The rating agency also anticipates net interest margin (NIM) in the banking sector to narrow further, following the 25-basis-point (bps) overnight policy rate cut last month.

"Malaysian banks' most recent quarterly financial results showed softer earnings, weighed down by sluggish loan growth and compounded by narrower NIMs," RAM Ratings said in a statement.

"The protracted trade dispute between the US and China has aggravated the cautious stance of businesses and consumers, with no resolution envisaged in the short term," it added.

The Malaysian banking system's year-on-year loan growth came in at a lacklustre 4.5% in April (April 2018: 5.6%), marking the fifth consecutive month of the downtrend since November 2018.

Loan applications decreased 4.7% on a three-month moving average basis, although loan approvals edged up 1.6%.

Credit demand from both households and businesses has waned, with noticeably slower business loan growth, the rating agency said.

"The eight anchor banks reported a weaker average pre-tax return on asset of 1.35% and return on equity of 13.2% in 1Q19 (1Q18: 1.43% and 14.1%).

"All but one posted thinner NIMs, reflecting the unrelenting competition for retail and small to medium enterprises deposits as well as the anaemic growth of current and savings accounts," it added.

On a brighter note, RAM Ratings does not expect the sector's gross impaired loan to exceed 1.6% this year, noting how banks are facing this difficult operating environment from a position of strength.

"Their asset quality has stayed robust, with a gross impaired loan (GIL) ratio of just 1.51% as at end-April 2019. The eight anchor banks' average credit cost ratio remained benign at 25 bps in 1Q19, even after excluding a one-off recovery from debt sale by a particular institution," it said.

"Earnings accretion, although weaker, will continue to lend support to the already healthy capitalisation levels of these banks," it added.