KUALA LUMPUR: Moody's Investors Service expects loan demand to recover further this year to strengthen its profitability, as banks’ asset quality and profitability improved last year.
Moody's vice president and senior analyst Simon Chen said although the banks funding remained adequate, its loan growth might be hampered by tight funding conditions.
“As a result, profit growth among banks with weaker deposit franchises is likely to be limited by higher funding costs,” he said in a research report.
Moody’s said funding profiles remain resilient, as loan to deposit ratios fell slightly for most banks in 2017 because of sluggish loan growth, but are likely to rise in 2018 when loan growth recovers.
The banks covered in the report include Malayan Banking Bhd, CIMB Group Holdings Bhd, Public Bank Bhd, RHB Bank Bhd, Hong Leong Bank Bhd and AmBank (M) Bhd.
Moody’s said these conditions should continue into 2018, and ongoing digital transformation efforts will support stronger growth in revenue and cost efficiencies.
“Loan growth will also rebound in 2018, supported by higher demand for corporate loans and stable consumer lending, and this development -- plus stable net interest margins --- will support bank profits.”
Moody's noted that asset quality will benefit from stronger macroeconomic conditions in 2018, both domestically and regionally.
“Those banks with exposure to the oil and gas sector should see their asset quality stabilise on stronger oil prices.”
Moody’s said overall credit costs will increase slightly from 2017, driven mainly by higher credit charges required under the Malaysian Financial Reporting Standards 9 (MFRS 9) effective January 1, 2018.
The research firm said bad loan ratios of most banks remained stable in 2017, despite the fact that banks with sizable operations in other parts of Southeast Asia recorded higher gross impaired loan ratios.
It said most banks posted improved profitability in 2017, driven by steady revenue growth, stable net interest margins and a moderation in credit costs.