Kuala Lumpur, 20 Nov 2022 – S&P Global Ratings expects Malaysian banks to grow their loan books by 5-6 % next year, arguing that steady domestic growth, high capital cushions and still-low unemployment will outweigh the drag from rising interest rates and inflation. The rating agency projects Malaysia’s real gross domestic product will expand 4.5 % on average over 2023-25, moderating from an estimated 6.6 % this year.
“The economy is normalising quickly, and that underpins our view that credit demand will stay positive,” said Ivan Tan, director of financial institutions ratings at S&P Global. He noted that private consumption, which accounts for roughly 60 % of GDP, continues to be supported by a tight labour market and the release of pent-up spending on travel, food and education.
Corporate borrowing is also picking up. Data from Bank Negara Malaysia show annual working-capital loan growth accelerated to 7.4 % in September, the fastest pace since 2015. Tan expects infrastructure projects tied to the government’s twelfth Malaysia Plan and continued investment in renewable energy and data centres to keep term-loan growth in the mid-single digits.
Asset-quality pressure remains manageable
While the headline numbers look benign, S&P warns that pockets of stress are forming among lower-income households and small and medium-sized enterprises that were already weakened by the pandemic. The central bank’s blanket loan moratorium ended in 2021, and targeted repayment assistance is tapering off. “We do expect non-performing loans to edge up, but from a very low base,” Tan said.
The system NPL ratio stood at 1.4 % at the end of September, compared with a 10-year average of 1.7 %. Provisioning buffers built during the crisis should absorb the hit.
Malaysian banks set aside 1.8 % of total loans in general reserves as of 30 June, while the sector’s common equity Tier 1 capital ratio averaged 14.3 %. “These levels give management room to recognise problems without having to raise fresh capital,” the report notes. S&P forecasts credit costs – the annual charge for new provisions – will fall to 30-40 basis points in 2023 from an estimated 45 bps this year, but remain above the 25 bps recorded in 2019.
Margins widen as rates climb
Rising interest rates are a double-edged sword. On the liability side, higher deposit costs squeeze funding spreads, yet asset re-pricing has moved faster. The overnight policy rate has risen by 100 basis points since May to 2.75 %, and swaps price in another 25 bp increase by March.
“About 60 % of system loans are floating rate, so the benefit comes through quickly,” said Tan. Net interest margins widened by an average 8 basis points in the third quarter, reversing five consecutive years of compression.
The agency expects the margin expansion to feed directly into profitability. Return on average assets is projected to reach 1.3-1.4 % next year, up from 1.1-1.2 % anticipated for 2022, once the one-off prosperity tax rolls off. “A normalised tax rate alone adds roughly 15 basis points to ROAA,” Tan calculates.
Fee income from wealth management and cross-border remittances is also recovering, helped by the reopening of regional borders.
Global headwinds could yet bite
The domestic picture is bright, but S&P cautions that external risks are tilted to the downside. A sharper-than-expected slowdown in China, Malaysia’s largest trading partner, would curb commodity exports and damp business sentiment. Further dollar strength could tighten domestic liquidity because 15 % of local deposits are held in foreign currency.
“If the Fed keeps hiking, emerging-market banks will feel funding pressure,” the report says, although it adds that Malaysian lenders rely on sticky retail deposits for 75 % of their funding, insulating them from wholesale market volatility. Geopolitical tension and supply-chain disruption could also push global inflation higher, forcing Bank Negara to tighten more aggressively.
Household debt already equals 89 % of GDP, among the highest in Southeast Asia, leaving borrowers sensitive to payment shocks. “Any spike in job losses would quickly translate into higher delinquencies,” Tan warns. For now, the unemployment rate has fallen to 3.7 %, just above the pre-pandemic low of 3.3 %.
Malaysian banks enter 2023 with capital ratios well above regulatory minima and liquidity coverage ratios near 150 %. That fortress balance-sheet, combined with a still-resilient economy, gives management scope to grow lending without stretching solvency metrics.
Yet the margin for error is narrowing: inflation, rates and global demand all need to move in line with the gentle scenario mapped out by S&P. If they do, the 5-6 % loan growth pencilled in for next year should be deliverable, keeping the sector’s recovery on track while returning profitability to levels last seen before Covid-19.
