Malaysian banking sector poised for robust loan growth in 2024

[MALAYSIA] The Malaysian banking sector is set to experience a strong year of loan growth in 2024, with forecasts pointing to an impressive 5.4% expansion. This optimistic outlook comes as the industry continues to demonstrate resilience and adaptability in the face of evolving economic conditions. As we delve into the intricacies of this forecast, we'll explore the factors driving this growth, the potential challenges ahead, and what it means for both consumers and investors in the Malaysian financial landscape.

Unpacking the Loan Growth Forecast

Strong Year-on-Year Performance

Despite some month-on-month deceleration, the banking industry's loan growth has remained remarkably strong. CGS International (CGSI) Research reports that by the end of November 2024, loan growth was holding steady at 5.8% year-on-year. This robust performance is particularly noteworthy given the economic headwinds that many sectors have faced in recent years.

Household and Business Loan Dynamics

The loan growth story is not uniform across all sectors. Household loans, while still showing healthy expansion, have seen a slight moderation. "The m-o-m deceleration was mainly due to household loans, which recorded an expansion of 6% y-o-y at end-November 2924 versus 6.1% y-o-y at end-October 2024," CGSI Research noted in their report. On the other hand, business loans have maintained a steady growth momentum, with a 5.4% year-on-year increase at the end of November 2024.

Projections for Year-End 2024

Assuming a continued month-on-month loan expansion of 0.6% to 0.7% in December, CGSI Research anticipates that the banking sector will close out 2024 with a loan growth range of 5.3% to 5.4%. This projection exceeds the firm's earlier forecast of 4% to 5%, indicating a more robust performance than initially expected.

Factors Contributing to Loan Growth

Government Initiatives

The Malaysian government's Ekonomi Madani initiatives are expected to play a crucial role in stimulating economic growth and, by extension, loan demand. These programs aim to boost various sectors of the economy, potentially leading to increased business loan activity.

Seasonal Influences

Kenanga Research points out that seasonal factors could contribute to loan growth in early 2025. "Going into 2025, we project for industry loan growth to come in at 6% and the overnight policy rate to be steady at 3%," the firm states. They anticipate increased household borrowing for mortgages and hire purchases due to the early timing of Chinese New Year and Hari Raya in the first quarter of 2025.

Economic Zone Developments

The upcoming signing of the definitive agreement for the Johor-Singapore special economic zone (SEZ) is seen as a positive development that could bolster domestic industries and attract foreign direct investment. This initiative has the potential to create new opportunities for business loans and economic expansion in the region.

Challenges and Risks

Auto Loan Deceleration

While the overall outlook is positive, there are some areas of concern. CGSI Research highlights a potential downside risk in the form of weaker expansion in auto loans. The growth in this segment has shown a decelerating trend, dropping from 10.1% year-on-year at the end of July 2024 to 8.7% by the end of November 2024.

Global Economic Uncertainties

The banking sector's performance is not immune to global economic trends. Kenanga Research notes that pending global developments will play a crucial role in steering Malaysia's economic trajectory. Banks are expected to deploy various strategies to enforce operational resilience and sustain earnings in the face of these uncertainties.

Positive Indicators for the Banking Sector

Improving Asset Quality

One of the most encouraging signs for the banking sector is the improvement in asset quality. CGSI Research observed a decline of RM320 million in the banking industry's gross impaired loans (GIL) from October to November. This trend has led to a continued decrease in the GIL ratio, which fell from 1.54% at the end of September to 1.51% at the end of November.

Benign Loan Loss Provisioning

The improvement in asset quality is expected to have a positive impact on banks' financial health. CGSI Research suggests that "banks' loan loss provisioning likely remained benign in the fourth quarter of 2024 (4Q24)". This could potentially lead to stronger profitability for banks in the coming year.

Outlook for 2025

Continued Growth Expectations

Looking ahead to 2025, CGSI Research projects loan growth to remain robust, albeit slightly lower than 2024 levels. They forecast growth of around 5% (between 4.5% and 5.5%) for the coming year. This projection suggests a continuation of the positive trend, albeit with a slight moderation.

Sector-Specific Growth Drivers

Kenanga Research provides insights into the expected drivers of loan growth in 2025. They anticipate that households will continue to take on mortgages and hire purchases, particularly in the first quarter due to seasonal factors. Meanwhile, business loans are expected to be driven by "reinvigorated service sectors and working capital needs".

Investment Implications

'Overweight' Rating on Banks

The positive outlook for the banking sector has led CGSI Research to reaffirm its 'overweight' rating on banks. This rating is based on "potential sector re-rating catalysts of an improved outlook for net interest margin or NIM and an uptrend in dividend payout ratios for most banks".

Top Picks in the Banking Sector

For investors looking to capitalize on the projected growth in the banking sector, CGSI Research highlights several top picks:

• Hong Leong Bank Bhd
• Public Bank Bhd
• AMMB Holdings Bhd (AmBank)

Kenanga Research also offers its perspective on attractive investment opportunities within the sector. They favor AmBank "on the back of a more solid return on equity as the group focuses on stronger earnings drivers as opposed to gaining market share in less profitable segments". Among large-cap banks, Malayan Banking Bhd (Maybank) stands out for its leading market share, better-than-industry asset quality, and expectations of outpacing its counterparts in earnings growth.

The forecast of 5.4% loan growth for the Malaysian banking sector in 2024 paints a picture of a resilient and dynamic financial landscape. Despite challenges such as global economic uncertainties and sector-specific decelerations, the overall outlook remains positive. The combination of government initiatives, improving asset quality, and strategic focus on profitable segments suggests that Malaysian banks are well-positioned to capitalize on growth opportunities.

As we move into 2025, the banking sector's ability to adapt to changing economic conditions and leverage new opportunities, such as the Johor-Singapore special economic zone, will be crucial. Investors and consumers alike should keep a close eye on these developments, as they are likely to shape the financial landscape in Malaysia for years to come.

The robust loan growth forecast not only reflects the current strength of the Malaysian banking sector but also signals confidence in the broader economic recovery. As banks continue to play a vital role in fueling economic growth through lending activities, their performance will remain a key indicator of Malaysia's overall economic health and resilience.