Malaysian banks poised for greater profitability amidst loan demand recovery

Improved asset quality is also in store for banks with O&G exposure.

As loan growth is set to recover in 2018, Malaysian banks are poised for greater profitability and asset quality as well as adequate capitalisation and funding for the year ahead, according to Moody’s Investors Service.

“Loan growth will also rebound in 2018, supported by higher demand for corporate loans and stable consumer lending, and this development -- plus stable net interest margins --- will support bank profits,” the credit agency said.

Banks with higher exposure to the oil and gas sector should also witness stabilising asset quality on the back of stronger oil prices.

The profitable streak of most Malaysian banks will extend for 2018 amidst ongoing efforts to digitise systems to improve revenue and cost efficiencies.

Here’s more from Moody’s Investors Service:

Most banks posted improved profitability in 2017, driven by steady revenue growth, stable net interest margins and a moderation in credit costs.

Overall credit costs will increase slightly from 2017, driven mainly by higher credit charges required under the Malaysian Financial Reporting Standards 9 (MFRS 9) effective 1 January 2018.

Capital ratios increased in 2017 from muted growth in risk-weighted assets (RWA), dividend reinvestment plans, and RWA optimization initiatives by some banks.

Whilst the banks will generally be able to support their balance sheet growth through steady retained earnings in 2018, some have estimated that MFRS9 implementation will result in a 20-80 basis point drop of Common Equity Tier 1 (CET1) ratios.

Funding profiles remain resilient, as loan to deposit ratios fell slightly for most banks in 2017 because of sluggish loan growth, but are likely to rise in 2018 when loan growth recovers.