PETALING JAYA: Despite the tough operating environment and ongoing geopolitical risks, the local banking sector is poised to see an encouraging loan growth of between 4% and 5.8% this year, owing to a strong job market and recovery in global trade.

The country’s strong labour market, according to banking analysts and economists, is expected to strengthen and return to pre-pandemic levels this year, which would support consumer spending and loan growth.

MIDF Research said the country’s unemployment rate is expected to average at 3.5% in 2023 and return to pre-pandemic level at 3.3% in 2024.

It said continued improvement in the labour market would support consumer spending as the wage recipient-to-employment ratio has reached a new peak of 64.6% in 2022, among others, owing to the minimum wage salary policy.

Meanwhile, UOB in a research note said it is maintaining its year-end unemployment rate forecast at 3.3% for both 2023 and 2024, adding that the labour market is expected to strengthen further and return to pre-pandemic levels in 2024, backed by the encouraging momentum of the domestic economy.

Malaysia’s exports grew 8.7% year-on-year in January to RM122.4bil, higher than the 3% projected by 17 economists in a recent Reuters poll. The latest export figure also reversed Malaysia’s exports downtrend, which started in March last year.

On the whole, total trade increased 13.3% to RM234.7bil in January. Trade surplus was at RM10.1bil, but this was lower than RM18.1bil in the same month a year earlier.

Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid, who is anticipating a loan growth of between 5% and 5.5%, told StarBiz he foresees a tough operating environment such as the rising cost of doing business and higher cost of living, which would cause banks to be more cautious in their credit underwriting standard.

“Businesses would also be mindful in rolling out their capital expenditure as they need to weigh the viability of their investment, as the need to ensure the payback period is reasonable to recoup their investment cost and at the same time, be able to expand their productive capacity to stay competitive in their respective industries.

“As for consumers, they might want to reprioritise their spending plans to cope with higher prices. Purchases of big-ticket items would need to be reexamined and may be delayed. So these are some of the permutations that could result in a more stable environment for loan growth,” Afzanizam added.

Loan growth last year stood at a fairly strong 5.3% growth. MIDF is forecasting 4.5% to 5% loan growth for 2024, with its top picks being CIMB Group Holdings Bhd and Alliance Bank Malaysia Bhd.

CGS International Research is projecting a slower loan growth of 4% to 5% this year, noting a potential slowdown in automotive loan growth from 9.7% in 2023 to low single-digit rates this year, on the back of expected weaker car sales.

RAM Ratings co-head of financial institution ratings Wong Yin Ching

Meanwhile, RAM Ratings co-head of financial institution ratings Wong Yin Ching said she is projecting a loan growth of 5% for this year.

She said early signs of a recovery in global trade and a robust job market are expected to lend support to loan demand this year, but the rating agency remains watchful of challenges in the global macroeconomic environment, elevated cost pressures and petrol subsidy rationalisation. As such, she projects loan growth for 2024 to ease somewhat.

As for net interest margins (NIMs), a measure of banks’ profitability, Wong said given the view that the overnight policy rate (OPR) would be kept unchanged at 3% this year, she anticipates NIMs to stay steady, although there is a possibility of a modest compression should deposit competition intensifies.

NIM is a measure of the difference between the interest income generated by banks and interest paid out to depositors. A wider NIM indicates higher earnings for banks.

RAM Ratings said there was a significant margin contraction in Malaysian banks’ profit performance in 2023.

The average NIM of eight selected local banks under its coverage narrowed 28 basis points to 2.07% – the lowest in the last five years. While multiple OPR hikes had initially resulted in considerable margin expansion in 2022, banks had to grapple with higher cost of funding in the past year as deposits gradually repriced upwards.

Stiffer competition for deposits and the expiration of forbearance allowing the use of government securities for statutory reserve requirement compliance further exacerbated the pressure on margins.

Wong said banks’ profitability should stay intact this year, adding however that there is limited upside in light of the prevailing uncertainties in the operating landscape.

“On the whole, we saw the average pre-tax return on assets and return on equity of eight selected local banks deteriorating to 1.36% and 13.6%, respectively (2022: 1.41% and 14%).

“At the after-tax level, however, the absence of the one-off prosperity tax lifted these profitability metrics higher than in 2022.”

UCSI University Malaysia associate professor of finance Liew Chee Yoong

With a target of a loan growth of 4% to 5.8% for this year, UCSI University Malaysia associate professor of finance Liew Chee Yoong said he expects NIMs to improve this year compared with last year.

He said this optimism is likely based on a more favourable interest-rate environment and improved lending activities, which should enhance banks’ interest income.

He said on the whole, profitability in the banking sector for 2024 is expected to be driven by higher loan growth, improved NIMs and potentially lower provisions for bad loans.

Bank Muamalat’s Afzanizam expects NIMs to continue to remain thin as competition in the deposits space would continue to exert pressure on funding cost.

Hence, he said fee-based income would be the focus as it would consume less capital and funding.

Also, he noted that gaining operational efficiencies would be the crucial endeavour for banks as this would keep their cost-to-income ratio in check.

“There could also be pockets of opportunities for trading books, especially in an environment of possible interest rate cuts globally.

“Perhaps, by extending the duration of the bonds portfolio would help to lock in gains. Overall, it’s a tough operating environment this year for banks,” he said.

Elaborating on the potential headwinds on the banking sector, Liew, who is also a research fellow at the Centre for Market Education, said these include the potential of a global economic recession as there are chances that developed economies are moving towards a recession whereby the UK and Japan have officially entered one.

He said this recession could spread to other parts of the world including Malaysia, with fluctuations in interest rates and regulatory changes that might impact profitability and operational costs.

“It is crucial for banks in Malaysia to navigate the year with strategic planning, focusing on digital transformation and enhancing customer service to leverage growth opportunities, while mitigating risks associated with economic and geopolitical uncertainties,” he added.