(NOV 14): Malaysian banks’ earnings will stay “rangebound” in 2025 as the sector grapples with pressure on profitability and a rise in bad debts, according to S&P Global.

Net interest margins, which measures the difference between interest received on loans and returns paid on deposits, could decline by three-to-five basis points due to intense competition for both loans and deposits, the ratings agency said in a report released on Thursday.

Return-on-assets will likely stay at 1.2%-1.3% with “limited upside” over the next two years, S&P Global said in its Global Banks Country-by-Country Outlook 2025. “Upside to profitability could come from lower credit costs if large banks choose to write back pandemic-related provisions.”

Banks have gradually written back some of the provisions, but still have a massive pile built up over the past few years to cushion for risks from the Covid-19 pandemic. The country’s largest lender Malayan Banking Bhd (KL:MAYBANK) alone is sitting on nearly RM2 billion worth of overlays.

Lenders in Malaysia have also been under pressure amid intense competition in a market where three dozen foreign and local lenders jostle for business. At the same time, banks also have to maintain comfortable levels of deposits and other buffers to support loan growth.

Rising bad loans to stay manageable

The industry's non-performing loan ratio could rise by “manageable” 20-25 basis points by end-2025 from 1.6% as of end-June 2024, S&P cautioned, flagging restructured loans, especially to low-income households and small to midsize enterprises.

“Cost pressures stemming from fuel subsidy rationalization could increase financial strain for low-income households and small to midsize enterprises,” the agency warned. “However, this is not our base case, because we think vulnerable segments would get financial assistance.”

Total loans meanwhile could grow 6% in 2025, the same pace estimated for this year amid economic growth and an increase in corporate demand led by key infrastructure projects, S&P said.

Common equity tier 1 capital — a measure of a bank’s capital strength based on the highest quality of regulatory capital — appears solid at 14.8% at the end of June and provisioning buffers at 1.6% of total loans will help them absorb a moderate rise in credit stress, the agency said.

What to watch out for in 2025

S&P however said it is watching household leverage and labour market conditions as Malaysian banks' asset quality is closely tied to employment levels, given a large share of household loans, and the high household leverage poses “some risk.”

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

S&P is also looking out for property market disruptions, citing banks’ material exposure to real estate development and construction which account for about 8% of total loans.

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