Photo shows an aerial view of the financial district in Kuala Lumpur. Malaysia’s banking sector could see a challenging 2020 brought on by subdued loan growth, surging credit costs and a possible contraction in Malaysia’s GDP, analysts observed.
KUCHING: Malaysia’s banking sector could see a challenging 2020 brought on by subdued loan growth, surging credit costs and a possible contraction in Malaysia’s gross domestic product (GDP), analysts observed.
“2020 is undoubtedly a washout year for banks, borne out in part by the 12 per cent year-on-year (y-o-y) contraction in the first quarter (1Q) core net profit for the banks that have announced results thus far,” said the research team at Maybank Investment Bank Bhd (Maybank IB Research).
It explained that the the main challenges for 2020 include much subdued loan growth, net interest margin (NIM compression in light of the OPR cuts, as well as surging credit costs.
“We expect industry loan growth to average just about two per cent this year and NIMs to compress eight basis points (bps) on average.
“We also expect credit costs to double from an average of 29bps in 2019 to 57bps in 2020,” it added.
Nevertheless, it highlighted that a bright spot is that bond yields have continued to decline and banks such as Maybank, RHB and AMMB have FVOCI reserves from unrealised investment gains that could
provide buffers to earnings should the banks choose to realise these gains.
“Against the backdrop of an expected 3.3 per cent contraction in Malaysia’s GDP, we project a five per cent contraction in operating profit and a 20 per cent decline in aggregate net profit for our banks this year,” Maybank IB Research said.
Despite its pessimism on the sector’s performance this year, the research team expected banks to record a recovery in 2021.
“Our economics team forecasts Malaysia’s GDP to rebound four per cent in 2021. Correspondingly, we expect a recovery in bank earnings too, and forecast aggregate operating profit to expand 5.7 per cent y-o-y, while aggregate net profit is expected to rebound 7.9 per cent y-o-y.
“This is premised largely on a recovery in NIMs as deposits reprice lower and lower, albeit still elevated, credit costs. We expect returns on equities (ROEs) to average 8.1 per cent in 2021 (7.7 per cent in 2020 and 10.2 per cent in 2019),” it added.