Malaysia: Steady growth

Healthy domestic demand is expected to drive growth in Malaysia’s banking sector this year as public projects help to stimulate lending. While international factors mean banks may take a more cautious outlook, the system as a whole is well capitalised and soundly managed, standing it in good stead for the future.

Loan growth is expected to reach some 8-9% this year, according to a recent report from RAM Ratings, a Malaysian credit research and advisory firm. Though good, this is much lower than 2011, when banks’ loan books grew by 14%. According to Wong Yin Ching, the head of financial institution ratings at RAM, the banking system is “shifting into lower gear”. Lending is likely to slow somewhat due to banks’ caution about the global outlook, but Yin Ching noted that, “the local banking industry is still fundamentally sturdy and the domestic economy remains resilient”.

Indeed, despite some uncertainty over the effects of the eurozone crisis, Malaysia’s domestic position looks strong, with a number of factors likely to support the growth of banks. GDP is expected to expand by 4-5% this year after growing 5.2% in 2011, according to the IMF, and continued low interest rates should drive banking expansion.

RAM expects Bank Negara Malaysia (BNM), the country’s central bank, to keep interest rates low, sticking to the current overnight policy rate of 3% – or possibly even lowering it if it sees the need to stimulate growth. This is good news for the country’s developers, who will likely need project financing to fund a number of big-ticket projects planned under the Economic Transformation Programme (ETP) and the 10th Malaysia Plan (10MP).

The firm’s analysis of the outlook is broadly shared by Standard Chartered Bank Malaysia, which expects single-digit retail loan growth this year. Tiew Siew Chuen, the country head of consumer banking at Standard Chartered, told local press she expected new BNM guidelines to cool retail lending, but the stimulus from the ETP would help support commercial loan growth, particularly to the rising small and medium-sized enterprise (SME) segment.

RAM expects the sector’s gross impaired-loan ratio to rise only slightly in 2012, from 2.7% to 3%. The loans-to-deposits ratio was 76% at the end of January, a “comfortable” level that the report suggests will be maintained through the year.

The health of the banking sector is heartening for foreign investors and Malaysian businesspeople alike, as it is clear the system has been successfully reformed since the 1997-98 Asian financial crisis. BNM is well regarded for its oversight of the sector and is largely responsible for the leaner, stronger and better-managed banking system that exists today.

To keep banks up to speed on best practices, structural reform is ongoing, with plans to implement Basel III requirements, as well as its own Financial Sector Blueprint 2011-20 (FSB). The implementation of Basel III capital requirements is due to start in 2013 and will be complete by 2019. RAM expects most Malaysian banks to have little difficulty in meeting the new standards, which will help bolster the system against shocks.

The FSB follows on from the successful Financial Sector Masterplan of 2001-10 and has been expanded further to liberalise banking, opening it to more international participation and boosting Malaysia’s role as a regional financial centre. Industry leaders and analysts have welcomed the reforms, though some questions remain about the specifics of implementation.

“There is no issue with the contents of the new FSB 2011-20, but the issue is what the timeline will be,” Sanjeev Nanavati, the CEO of Citibank Malaysia, told OBG. “There are a lot of things to be achieved over a 10-year period, but it is unclear which of these are more urgent than others. Specificity in terms of timelines would be helpful.”

Malaysia’s banking sector has seen quite an overhaul in the past decade and is now a model of stability. While it seems likely that the international situation will slow lending somewhat in 2012, it will still rise at a respectable rate, and the long-term path should see further growth and reform.

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