Saturday June 8, 2013

Loan growth likely to pick up in H2


THE softening loan growth situation is seen by analysts as a blip rather than a trend.

Recent data showed that total loan growth in April had slowed down for the second month to 10.5% on a year-on-year (y-o-y) basis compared with 10.6% y-o-y in March and 11.4% y-o-y in February.

Loan growth has so far been better than last year. On average, growth for the first four months of this year was 10.95% compared with 10.4% at end-December last year.

Analysts are expecting loan growth to pick up moderately in the second half of the year and the immediate beneficiary of this is the banking sector.

“Post-election, we have upgraded the banking sector to overweight based on its resilience currently at maintaining a double-digit loan growth, driven by the big cap banks with overseas franchise,” says M&A Securities in a note.

Household loans have been the driver of growth in April as business loans have slowed but analysts expect the conclusion of the general election to change things.

“With the conclusion of the 13th general election and together with it, uncertainty over Malaysia's long-term plans, business loans growth should pick up momentum led by manufacturing and construction,” says M&A.

Analysts have mixed views on loan growth but there is a consensus that the Economic Transformation Programme (ETP) and the 10th Malaysia Plan projects are likely to support growth with the removal of the political overhang this year.

Maybank deputy president and head, community financial services Datuk Lim Hong Tat says that it is too early to provide statistics on the growth in business loans following the recently concluded general election.

“However, we are expecting loan growth to pick up in the coming months especially given that the implementation of the ETP projects is expected to gain greater traction,” he tells StarBizWeek in an email reply.

The business segment recorded weaker loan growth in April even though household loans remained robust.

“Business loan growth might have slipped again in May, going by the slowing business-loan indicators amid general election uncertainties,” says CIMB research in its recent report.

Nonetheless, the research house does not think that the situation will prevail as it has raised its 2013 loan growth target to between 11% and 12% from between 10% and 11% previously.

It expects loan demand to pick up in second half of the year.

Meanwhile, RAM Ratings chief economist Dr Yeah Kim Leng says the current slowdown in business lending may create some concerns, but he expects business lending to accelerate in later part of the year on the continuation of the ETP projects.

“We expect the Government to accelerate ETP implementation and that will energise the private sector,” he says.

OCBC Bank country chief risk officer Choo Yee Kwan says that post-general election, loan growth would be supported by a quicker pace of capital spending in domestic-oriented sectors, the oil and gas industry and the on-going implementation of infrastructure projects, particularly those arising from the ETP and the 10th Malaysia Plan.

“We expect construction activities to pick up pace, particularly the rail infrastructure projects,” he says, adding that the construction sector will be one of the main drivers of the Malaysian economy.

Choo says another segment of business loans that is expected to show robust growth is lending to the small and medium-sized enterprises (SMEs).

Moderation is key

Yeah expects total loan growth to increase moderately and the household segment will grow moderately on the back of stricter lending guidelines while business loan growth will inch higher.

“We are likely to see a shift in lending for business given that the political uncertainty is over. We do expect businesses to firm up and foresee businessmen resuming their investments,” he says.

Household loans had fallen to 11.8% in 2012 compared with 12.9% in 2011 but the household debt level remained high at 80.2% of gross domestic product (GDP).

CIMB Group Holdings Bhd deputy CEO and head of consumer banking Renzo Viegas says there was a softening trend of household debt growth for the past year.

“We estimate Malaysia's household debt growth will moderate by 11.4% to RM840.6bil to 83% by end-2013.”

He says the country household debt to GDP is relatively high compared with regional peers like Thailand (77.6%) and Singapore (76.4%). But Malaysia's savings rate is one of the highest in the world, at 34% of gross national product.

“The current household debt to GDP is sustainable as long as the Malaysian economy continues to grow, income level continues to rise and interest rates remain low as well positive measures taken by the central bank to cool property prices and contain the rise in household debt.

“This will help prevent an asset bubble,” he explains.

Viegas expects auto loans to “chart better growth” in view of improving customer sentiments as the Government is determined to gradually reduce car prices by 20% to 30%.

He expects ETP projects to continue which will have spillover effect on credit demand in some SMEs.

Malaysia Rating Corp Bhd chief economist Nor Zahidi Alias says “slower loan growth in the household sector is a welcome development.

“Tempering households' enthusiasm in taking loans is necessary in my view, as an overstretched household balance sheet would pose a risk to the consumer segment, a sector that has become an important pillar to the Malaysia's economy since the Asian financial crisis,” he says.

Sound asset quality

Although the growth of the GDP in the first quarter has slowed down, the potential increase in non performing loans (NPLs) is unlikely at this point as economists are expecting GDP growth to pick up in the second half of the year on the back of robust domestic demand.

A loan is categorised as non-performing when the principle or interest payment is due and unpaid for more than three months.

Looking at the historically low non-performing loan ratio, there is no sign of rising bad loans but certainly the risk is there.

“We have observed an increase in household debt in Malaysia, which impairs the quality of loans that are more sensitive to rises in interest and unemployment rates,” Standard & Poor's says in a report.

“We believe Bank Negara will maintain the overnight policy rate (OPR) at 3%. A high ratio of household debt to GDP in Malaysia and the central bank's move to rein in consumer indebtedness are likely to counter balance pressure to lower policy rates to tackle an economic slowdown,” it says.

Hong Leong Research expects asset quality to “hold up” given the strong financial position in both the business and household segment. There is a stable job market situation, albeit high household debt for the lower income group.

“Although the just concluded reporting season saw absolute amount of impaired loan increased in several banks, we believe most were due to seasonality,” it says.

Yeah says any increase in NPLs will be due to slow loan expansion, nonetheless the case is unlikely.

“Currently, the NPL ratio is considered healthy, we do not see any spike, suggesting that bank asset quality will remain stable and sound,” he adds.

He expects the OPR to remain as the global economy improves slightly in second half of the year.

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