RHB Bank Bhd and AMMB Holdings Bhd (AmBank) will begin merger talks to create one of Malaysia's biggest lenders, two sources familiar with the matter said on Wednesday (31/05). (Reuters Photo/Edgar Su)

Weaker Loan Growth, Ringgit Add to Headwinds for Malaysian Banks


NOVEMBER 25, 2016

Kuala Lumpur/Hong Kong. Leading Malaysian banks' deposits and loans posted their weakest average growth in at least two-and-a-half years in the third quarter, with the fragile ringgit currency and growing economic uncertainties set to put more pressure on profitability.

The growing pressure on banks' bottom lines comes as Malaysia's economy is being buffeted by slumping commodity prices and a political and financial scandal at state fund 1Malaysia Development (1MDB).

Analysts said that while the ringgit's slump to a near 14-month low will not have a direct impact on local banks due to their limited dollar exposure, it would add to their asset quality woes as it affects corporate sector profitability.

"Within the banking system, we see a sharp decline in loan growth from a year ago, reflecting the weaker sentiment evident among corporates and consumers," said Simon Chen, vice-president and senior analyst at rating agency Moody's.

"Our view is that this slow pace of credit growth will persist over the next 12-18 months. We do not expect a significant pick-up in business loan growth, given the challenging external environment."

The average loan growth at seven of Malaysia's top 10 banks, including Malayan Banking Bhd and Public Bank, was 1.2 percent in the September quarter, its weakest since at least the March quarter of 2014, according to Thomson Reuters data.

Bank deposits grew an average 1.8 percent in the latest quarter, also the weakest rate of growth since at least the March quarter of 2014, the data showed. Comparable historical data for some banks was not available beyond 2014.

Underscoring the challenges for the sector, the country's biggest lender Maybank on Thursday (24/11) posted a fall in third-quarter profit and cut its loan growth projection for the current financial year.

The lender's fourth straight quarterly drop in profit comes amid slowing loan growth at home and exposure to the oil and gas industry that has been hit by falling prices.

Maybank lowered the full-year estimate for loan growth to 2-3 percent from its initial forecast of 8-9 percent, and also cut the forecast for return on equity to 10.5-11 percent from previous guidance of 11-12 percent due to "selective asset growth."

"We are mindful of potential asset quality weakness in a slowing economic growth environment in some of our key operating markets," Maybank said in a statement.

Asset quality

Malaysian banks, which have traditionally enjoyed strong capital buffers and stable asset quality, have seen their bad loans rising in the last few quarters as some of their exposure to the oil and gas industry took a hit from falling prices.

Malaysian oil and gas service provider Petroleum Teknologi's default on a S$125 million ($91.3 million) bond in October highlights that pressure on the asset quality of local banks will remain, some analysts said.

Adding to asset quality concerns is the ringgit, which has slumped 7 percent over the last two weeks — the worst performing currency in Asia.

"If ... we continue to see further volatility in the ringgit leading to more pain for the corporate sector because of a further weakening in topline growth, then I think cash flows for the corporate sector may deteriorate," said Moody's Chen.

"Such a situation could slowly lead to asset quality challenges for the banking system."