For low-income families and small and medium-sized businesses (SMEs) in Malaysia, access to loans can be a lifeline, helping them navigate economic challenges and achieve their goals. However, these groups are also among the most vulnerable to economic shocks, such as the Covid-19 outbreak, higher interest rates, and inflation. According to S&P Global Ratings, the Malaysian banking sector is expected to continue expanding loans at a rate of 5% to 6% in 2023, which should help sustain the creditworthiness of Malaysian consumers and enterprises.
The stable economy of Malaysia is a key factor in this anticipated loan growth, with GDP growth projected to be 6.6% in 2022 and 4.5% on average over the following three years. This economic stability, combined with the strong capitalization and provisioning buffers of Malaysian banks, should help the sector withstand growing asset quality risks. As of June 30, Malaysian banks had provisioning buffers of 1.8% of total loans and a common equity Tier 1 ratio of 14.3%, indicating a high level of capitalization.
Economic Outlook and Banking Sector
Despite the positive outlook, there are still challenges facing the Malaysian banking sector. Loans to low-income families and SMEs may be under threat due to the ongoing impact of the Covid-19 outbreak, as well as higher interest rates and inflation. However, S&P Global Ratings notes that the substantial provisioning buffers of Malaysian banks should prevent the need for further provisioning, even in the face of an increase in non-performing loans (NPLs). As banks are likely to maintain caution in the face of global headwinds, credit costs are expected to decrease to 30 to 40 basis points, although they will remain higher than pre-pandemic levels.
In terms of bank earnings, S&P Global Ratings predicts that greater margins, a moderation of lending costs, and a normalized tax rate will help banks’ earnings get closer to pre-pandemic levels. In fact, the rating agency forecasts a return on average assets of 1.3% to 1.4% in 2023, compared to 1.1% to 1.2% anticipated for 2022. This improvement in earnings, combined with the strong capitalization and provisioning buffers of Malaysian banks, should help the sector navigate the challenges ahead.
Global Banking Sector Outlook
Taking a broader view, S&P Global Ratings notes that 2023 is expected to be a harder year for the global banking industry. Despite the fact that most bank ratings are stable, the rating agency believes that the size of the challenges facing the industry will be put to the test. In many jurisdictions, net interest margins are expanding as a result of rising interest rates, which should provide a boost to bank earnings. However, the ongoing impact of the Covid-19 outbreak, as well as higher interest rates and inflation, may reduce credit demand and raise default risks for some low-income households and SMEs.
Looking ahead, it will be important to watch how the Malaysian banking sector performs in 2023, particularly in terms of loan growth and asset quality. As the global economy continues to navigate the challenges of higher interest rates and inflation, the ability of Malaysian banks to withstand these headwinds will be crucial. With their strong capitalization and provisioning buffers, Malaysian banks are well-positioned to support the economic growth of the country, but they will need to remain cautious and adaptable in the face of an uncertain global outlook.
What to Watch Next
As we look to the future, there are several key factors to watch in the Malaysian banking sector. The impact of higher interest rates and inflation on credit demand and default risks will be crucial, as will the ability of banks to maintain their strong capitalization and provisioning buffers. Additionally, the performance of the global banking industry will be an important indicator of the overall health of the financial system. With S&P Global Ratings predicting a harder year for the industry in 2023, it will be important to monitor the progress of the sector and adjust expectations accordingly. As the year unfolds, we can expect to see more data and analysis on the performance of the Malaysian banking sector, which will help to inform our understanding of the challenges and opportunities facing the industry.
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