KUALA LUMPUR: Malaysia's banking sector credit growth is expected to improve to six per cent next year, according to S&P Global Banking Outlook 2025.
The firm said the growth will be backed by higher economic growth and an increase in corporate demand led by key infrastructure projects.
"Our estimates put Malaysia's gross domestic product (GDP) growth at 4.8 per cent in 2025. In our base case, we forecast policy rates to decline to 2.75 per cent in 2025, from the existing 3.0 per cent," it said in a note.
On asset-quality, S&P Global said cost pressures stemming from the nation's fuel subsidy rationalisation could increase financial strain for low-income households, and small to midsize enterprises.
"However, this is not our base case, because we think vulnerable segments would get financial assistance. "Meanwhile, the solid capitalisation (14.8 per cent common equity Tier-1 ratio as of end-June 2024) and provisioning buffers (1.6 per cent of total loans) will help banks to absorb a moderate rise in credit stress," it said.
S&P Global forecasts that Malaysia's bank net interest margins could decline by 3-5 basis point (bps) due to intense competition for both loans and deposits. Over the next two years, the firm said forecast return on assets to stay at between 1.2 per cent and 1.3 per cent.
"Upside potential to profitability could come from lower credit costs if large banks choose to write back pandemic-related provisions," it said.
Overall, S&P Global said the banking sector's outlook for Asia-Pacific is expected to remain volatile despite US rate relief.
While most Asia-Pacific central banks will gradually follow the US Fed in cutting rates, the firm said domestic factors will vary the pace of monetary easing across the region.
"Still strong global demand and diversification of manufacturing to outside China generate growth opportunities for export-centric Asia-Pacific countries."
"With the US and Europe poised for a soft landing, we expect Asia-Pacific's growth to stay at 4.4 per cent over 2024-2025."
"An unexpected global hard landing could spur risk-off sentiment and capital outflows, particularly in emerging Asia. Japan's exit from near-zero rates could risk the abrupt unwinding of carry trades and longer-term shifts inasset allocation," it added.Ends