Business

Saturday April 11, 2009

Deposits may surpass loans growth this year

By DALJIT DHESI


The bleak economic outlook, coupled with the looming recession hitting hard on Malaysian shores, are making banks more cautious and selective in lending. This, among other factors, is expected to put the brakes on the banking system’s loans growth this year.

On the flipside, analysts and banks expect deposits to grow in the coming months as consumers become more risk averse.

Is this trend of higher deposits and lower loans growth good for the banking and financial system?

»Malaysians are known for being net savers« NOR ZAHIDI ALIAS

Malaysian Rating Corp Bhd (MARC) chief economist Nor Zahidi Alias says in view of the weakening economy, he expects total loans to record marginal growth this year compared with last year’s 12.8% expansion.

He attributes this to weak business sentiment which has resulted in companies slashing their capital spending, overstretched consumer balance sheet (as evidenced by high household debt-to-GDP ratio of 63.1% in 2008) and rising unemployment, leading to higher lending standards by banks to protect asset quality.

Due to these factors, Zahidi anticipates deposits growth to surpass loans growth this year.

Net savers

In addition, he adds, Malaysians are known for being net savers as evidenced by deposits outpacing loans growth by an average 2.5% since 1996 and low loans-to-deposit (LD) ratio of 73.6% in February.

Given the ongoing recession in advanced economies and its potential impact on Malaysia, Zahidi says banks will likely make every possible effort to strengthen their financial standing by increasing their deposit base and preserving capital.

By doing this, he says, they will remain resilient and continue with their lending activities, which will benefit consumers and the banks themselves.

As a result, he says, the LD ratio will linger below the 10-year average of 80% while the risk-weighted capital ratio (RWCR) will stand comfortably above 8%, enabling banks to continue lending.

AmResearch banking analyst Fiona Leong says she does not expect the LD ratio to come down by a large quantum as banks will have to ensure a good balance between loans and deposits.

Leong says banks are careful about managing their deposits because they will want to maintain their deposit base as it is the cheapest form of funding.

Consumers are depositing because many are risk averse and have limited choice or option for other investments in view of the unfavourable economic climate.

RAM Rating Services Bhd head of financial institutions ratings Promod Dass, however, says based on the current trends, he feels deposits growth is unlikely to surpass loans growth.

Balancing act

Loans and deposits growth is a balancing act in banks’ asset-liability management strategy and the proportion of customer deposits versus interbank funding is dependent on such strategy.

»Excess in deposits versus loans and deposit rates will drop due to oversupply« JEFFREY CHEW

As such, RAM’s Dass reckons most banks are optimising their funding mix. The LD ratio was about 72% at end-2008 and he expects this to move within the 70%–80% range this year, indicating ample liquidity in the banking system.

This, he adds, will enable banks to continue lending to corporates and consumers as well as managing their respective asset-liability management objectives.

Total loans in the banking system as at February stood at about RM729bil while total deposits stood at RM976bil.

Year-on-year loans and deposits growth in February were 10.9% and 8.3% respectively.

Currently, deposits in the banking system are in excess of RM250bil.

If this trend continues, OCBC Bank (M) Bhd director and CEO Jeffrey Chew says, there will be larger excess in deposits versus loans and the deposit rates will correspondingly drop due to oversupply.

This might become an issue for those who depend very much on interest income from deposits, he adds.

Last year, the bank’s loans growth was 13% against deposits growth of 17%. For 2009, Chew says the bank expects deposits growth to outpace loans growth again by a greater margin, as demand for loans has declined.

While the lower LD ratio serves to boost the liquidity position of banks, a declining interest rate environment could hurt banks’ earnings as the income from loans growth will be limited, he adds.

Alternative products

United Overseas Bank (M) Bhd senior head of personal financial services division Tay Han Chong says consumers may want to also look at other alternative deposits to increase yields such as capital-protected products or savings-skewed insurance products, especially if it is of low risk and meant for slightly longer term.

“Those who are waiting for good opportunities to invest may consider putting money into shorter tenure fixed deposits or even savings and checking accounts for greater flexibility,” Tay adds.

As for UOB Malaysia, he says, the bank will continue with a long-term focus on growing its banking franchise, which includes expanding both loans and deposits.

The bank expects to launch deposits and loans campaigns because having a healthy LD ratio is more critical than an absolute higher or lower LD ratio, he explains.

According to Chew, OCBC Bank will continue to introduce innovative conventional and syariah-compliant deposit products this year to meet the ever-changing wealth management needs of its customers.

Recently, the bank consolidated its base of syariah-compliant wealth management products to ensure that customers have a solid range of such products to place their funds into.

RAM’s Dass says it is very likely that banks will continue with innovative campaigns to attract deposits this year, given the opportunity to secure cheaper funding and to establish greater presence in the deposits market.

“The challenge is that deposits are typically ‘sticky’ in nature, as customers would not normally move deposits around unless the incentive is great enough,” he notes.

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