A bright spot for the banking sector | Techy Kings


PETALING JAYA: With the year 2022 coming to an end, banks are expected to be ready to face a more difficult business environment amid macroeconomic problems in 2023.

Despite these challenges, bankers and analysts say it is not all doom and gloom as there are bright spots that will put the sector on a growth trajectory, noting that they expect good loan growth of between 4.5% and 5.5% for next year.

They also expect positive earnings growth for 2023 amid a challenging business and economic landscape.

AMMB Holdings Bhd Group Chief Executive Officer (AmBank) Datuk Sulaiman Mohd Tahir told StarBiz that global pressures, including rising inflationary pressures from geopolitical uncertainty, global supply chain disruptions and rising commodity prices are expected to remain high.

He expects loan growth for the sector in 2023 to be in the range of 4.5% to 5.5% based on a projected gross domestic product growth of 4.5%.

For 2022, he expects loan growth between 6% and 6.5%.

The banking system’s annual loan growth in September 2022 amounted to 5.8% compared to 4.6% in 2021.

“We think that credit deterioration and additional credit costs for 2023 will remain manageable with the support of moderate interest rate hikes and continued economic recovery.

“Banks have accrued loan loss reserves since the start of the Covid-19 pandemic and we see this buffer as sufficient compared to the expected credit losses in 2023.

“In terms of the landscape for 2023 for local banks, AmBank expects competition to increase, especially for long-term deposits next year,” he said.

Sulaiman said despite the challenging situation ahead and based on the group’s successful track record over the years, it was able to dominate the market share given its strong foundation and driven by the bank’s dynamic team.

Meanwhile, OCBC Bank (M) Bhd Chief Executive Officer Datuk Ong Eng Bin projected loan growth of 5% next year, and agreed that 2023 will be a challenging year for the banking sector.

The sector will benefit from the positive, albeit slow, growth projected for 2023. However, he said the overall macro outlook remains uncertain as the country is closely tied to the challenging world economy.

Inflation, weak global growth, coupled with a looming recession in developed countries, geopolitical tensions and the Russia-Ukraine war will continue to impact the economy, which in turn will affect business and consumer sentiment and the banking landscape, he said.

In terms of earnings for next year, he said that although the bank is currently slightly affected by weaker trading and investment performance due to market uncertainty, earnings will improve on the back of increased margins and lower credit costs but will be weighed down by the additional prosperity of the 9% tax (on taxable income exceeding RM100 million).

“Going into the uncertain 2023, we expect the positive trend in net interest margin (NIM) to continue with increased fees and trading performance as interest rates stabilize while credit costs return to normal,” said Ong.

NIM is a measure of the difference between the interest income generated by the bank and the interest paid to depositors. A wider NIM indicates higher earnings for the bank.

AmBank’s Sulaiman, who expects NIM to increase by around 1.5 basis points (bps) in the fourth quarter of 2022, said the bank will remain steadfast in driving business organically, moving forward, by looking at strategic initiatives that will enable it to achieve cost savings.

Regarding bank profitability, RAM Rating Services Bhd’s co-head of financial institution rating Wong Yin Ching said the bank’s NIM is expected to widen this year given the increase in the overnight policy rate (OPR) accumulated by 100 basis points.

However, he expects the situation to change in 2023, with margin contraction seen as deposit repricing increases, competition remains fierce and the share of current and savings accounts (CASA) returns to normal.

“Our view has taken into account the potential increase in OPR by 25 basis points in the first quarter of next year (1H23).

“Overall, we expect the bank to show an improvement in profit performance next year.

“Narrower NIM and slightly slower loan growth will be more than offset by lower impairment charges or write-backs and the absence of a one-off Wealth Tax,” he added.

RAM’s Wong believes that the domestic banking industry will remain fundamentally resilient despite the current macroeconomic headwinds.

Overall credit pressures have eased somewhat with the reopening of the economy although rating agencies are wary of challenges related to rising cost pressures, higher borrowing costs and slower global growth, he said.

He said that although bad loans are increasing, provisioning expenses are not expected to increase in line, given that banks have built a robust provisioning buffer since the start of the epidemic.

“For 2023, we expect banks to record modest loan impairment charges or even net write-offs for some, as excessive management stacks may be reversed. However, we believe the bank will be wise in issuing this advance provision,” said Wong.

He forecast the industry’s gross impaired loan (GIL) ratio to rise at a higher 2.2% in 2023 (see chart), adding that the figure is still considered healthy. The GIL ratio increased to 1.82% at the end of September 2022 compared to 1.68% at the end of December 2021.

UCSI University Malaysia assistant finance professor Liew Chee Yoong, who is also a research fellow at the Market Education Center, expects more challenges for the banking sector this year.

He said this was partly due to the US Federal Reserve (Fed) expected to continue raising interest rates, which Bank Negara would follow suit.

The banking sector, he said, is part of the financial intermediary that plays a very important role in the country’s financial system, as it helps channel funds from savers (depositors) to users of funds (borrowers) in the economy.

If interest rates continue to rise in 2023, demand for bank loans will further decrease as debt financing becomes more expensive, he said.

Liew said this would reduce the flow of funds from savers to consumers which would weaken the effectiveness of the financial system as a whole.

“In the long term, this will create a problem of lack of investment, which will hinder the country’s economic development,” he said.

Liew, who projects loan growth of between 1% and 3% for 2023, expects bank earnings to fall next year following further increases in interest rates by Bank Negara and also in anticipation of a major global recession.

“The banking sector in this country needs to conduct periodic stress tests to ensure they have sufficient capital to face the consequences of further interest rate increases in 2023 as well as the expectation that a major global recession will occur next year.

“If interest rates are raised again in 2023, financing costs will be more expensive for borrowers and as a result, financial risk and loan default risk will increase. This is likely to increase GIL in 2023,” he said.


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