KUALA LUMPUR (July 17): The banking industry's non-performing loan ratio (NPL) could rise by 20 to 25 basis points (bps) by end-2024 from 1.6% as of April 2024, said Standard & Poor's (S&P) in its Global Banks Country-by-Country Mid-year Outlook 2024 Report released on Wednesday.

“This could come from restructured loans, especially to low-income households and small to mid-sized enterprises. Sustained currency depreciation could affect import-reliant sectors [manufacturing, construction, and agriculture],” it said. Nonetheless, it expects the deterioration in asset quality to be "manageable".

S&P also noted the level of restructured loans has diminished steadily and stood at about 2% at end of 2023.

Meanwhile, the firm said credit costs should stay at 15-20bps, similar to the pre-pandemic average, given adequate provisioning.

“We forecast credit growth will improve to 5-6% in 2024, benefitting from higher economic growth and an increase in corporate demand, led by key infrastructure projects,” it added.

S&P projected Malaysia's gross domestic product (GDP) to grow about 4.3% in 2024, 4.5% in 2025, better than 3.5% in 2023.

“In our base case, we forecast policy rates in the country have peaked.”

Moving forward, S&P noted that banks' net interest margins could decline by 3-5bps due to intense competition for both loans and deposits.

“Over the next two years, we forecast return on assets to stay at 1.2-1.3%. Upside potential to profitability could come from lower credit costs if large banks choose to write back pandemic-related provisions.”

Meanwhile, S&P said higher-for-longer rates and cost pressures could increase financial strain for low-income households and small to midsize enterprises.

“However, this is not our base case,” it added.

Meanwhile the solid capitalisation (14.9% common equity Tier-1 ratio as of end-2023) and provisioning buffers (1.5% of total loans) will help banks to absorb a moderate rise in credit stress.

Given that Malaysian banks' asset quality is closely correlated to employment levels, given a large share of household loans, high household leverage poses some risk, said S&P.

“However, stable employment and adequate household financial assets are mitigating factors.

Meanwhile, S&P noted that Malaysian banks have material exposure to real estate development and construction, at about 8% of total loans.

“Oversupply in the commercial real estate market and elevated office vacancy rates remain structural challenges. Banks have been cautious in lending to this sector and have gradually reduced exposure,” it added.