Leading Malaysian banks' deposits and loans posted their weakest average growth in at least 21/2 years in the third quarter, with the fragile ringgit and growing economic uncertainties set to put more pressure on profitability.
The growing pressure on banks' bottom line comes as Malaysia's economy is being buffeted by slumping commodity prices and a political and financial scandal at state fund 1Malaysia Development Bhd (1MDB).
Analysts said that while the ringgit's slump to a near 14-month low will not have a direct impact on local banks due to their limited US dollar exposure, it would add to their asset quality woes as it affects corporate sector profitability.
"Within the banking system, we see a sharp decline in loan growth from a year ago, reflecting the weaker sentiment evident among corporates and consumers," said Mr Simon Chen, vice-president and senior analyst at rating agency Moody's.
"Our view is that this slow pace of credit growth will persist over the next 12 to 18 months. We do not expect a significant pick-up in business loan growth, given the challenging external environment."
Average loan growth at seven of Malaysia's top 10 banks, including Malayan Banking and Public Bank, was 1.2 per cent in the September quarter, its weakest since at least the March quarter of 2014, according to Thomson Reuters data.
Bank deposits grew an average 1.8 per cent in the latest quarter, also the weakest rate of growth since at least the March quarter of 2014, the data showed.
Underscoring the challenges for the sector, the country's biggest lender, Maybank, yesterday posted a 5.4 per cent fall in third-quarter profit to RM1.8 billion (S$581 million). Its fourth straight quarterly drop in profit comes amid slowing loan growth at home and exposure to the oil and gas industry.
Maybank lowered the full-year estimate for loan growth to 2 to 3 per cent from its initial forecast of 8 to 9 per cent, and cut the forecast for return on equity to 10.5 to 11 per cent from previous guidance of 11 to 12 per cent due to "selective asset growth".
Malaysian banks, which have traditionally enjoyed strong capital buffers and stable asset quality, have seen their bad loans rising in the last few quarters as some of their exposure to the oil and gas industry took a hit from falling prices.
Malaysian oil and gas service provider Petroleum Teknologi's default on a S$125 million bond last month highlights that pressure on the asset quality of banks will remain, some analysts said.
Adding to asset quality concerns is the ringgit, which has slumped 7 per cent over the last two weeks - making it the worst-performing currency in Asia.
This article was first published on November 25, 2016.
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