Overview
Malaysian banks are moving into 2023 with loan books that continue to expand, but the period of easy growth has ended. The sector now faces a mix of fading supportive factors and rising cost pressures that have prompted a reassessment by analysts.
Rating Adjustment
Hong Leong Investment Bank Research lowered its rating on the Malaysian banking industry to neutral this week. The move reflects the view that the conditions that once made the sector a clear buy are no longer present, even though the analysts do not see an imminent danger to banks.
Loan Growth Figures
In October 2022, overall loan growth stood at 6.5 percent, unchanged from the previous month. Household lending increased by 6.3 percent, while commercial lending rose by 5.5 percent. Every sub‑segment of household borrowing showed an increase during the period.
Underlying Pressures
Analysts noted three main headwinds: a slower pace of expected interest rate hikes for the coming year, intense competition for deposits, and a softer macro‑economic outlook. Together, these factors are making the industry less attractive to investors despite current valuations remaining modest.
Deposit Competition and Margins
The battle for deposits has become the most immediate problem for banks. As they offer higher rates to attract funds, the cost of gathering money rises. At the same time, the rates paid on existing savings and current accounts are falling. This squeeze—paying more to bring in deposits while earning less on the money already held—directly hits profitability.
Cost Structure
Operating expenses are not falling in line with slower revenue. Staffing and technology costs remain sticky because banks have invested heavily in digital platforms and hired additional personnel to stay competitive. Those expenses continue to accrue irrespective of economic conditions.
Provisions and Asset Quality
Banks are setting aside larger amounts to cover potential loan losses, a practice referred to as macroeconomic overlays. This reflects concern that asset quality could deteriorate if the economy weakens, raising the prospect of higher defaults after a prolonged period of clean books.
Sector Resilience and Buffers
The downturn is not viewed as a sudden crisis. Banking stocks have been regarded as safe holdings even amid broader economic worries. Banks can still bolster earnings through non‑interest sources such as fees and commissions, which provide a cushion against weakening lending income.
Future Prospects
The trajectory of the sector will depend on how deep the economic slowdown becomes. If growth eases only modestly, banks are expected to manage the pressures. Should the slowdown sharpen, the combination of deposit competition, inflexible costs, and rising loan provisions could exert a stronger negative effect.
