Banking sector sees mild credit cost uptick

PETALING JAYA: Malaysia’s banking sector is expected to navigate the current period of slower economic growth without major disruptions, though small and medium enterprises (SMEs) may come under pressure, potentially nudging up credit costs slightly.

According to analysis by CIMB Research, the sector’s credit outlook remains stable despite macroeconomic headwinds.

“We have reviewed our sector credit-cost projections, taking into consideration the potential impact of slower growth on the SME segment and historical trends,” the research house said.

In its updated scenario analysis, CIMB Research flagged that credit costs could inch up by 12 basis points (bps) due to changes in assumptions tied to the probability of defaults for SME loans.

“Assuming the probability of default is raised to 6% from 4.5% for the SME segment, while losses given defaults are maintained at 50%, this implies that the estimated credit loss may need to be raised by 75 bps for the SME segment in a slowing growth cycle,” the research house said.

However, the projected 12-bps increase remained within the 15-bps hike the firm had earlier anticipated.

“As this is within our earlier assumed 15-bps increase in credit costs for the sector, we are maintaining our credit cost assumptions for now,” it said.

The SME segment accounts for 16.5% of total loans on average for banks under CIMB Research’s coverage.

Although direct exposure to export-related loans is limited – ranging from just 1% to 4.7% of total loans – indirect effects could still manifest.

“We reiterate there will likely be larger impact from secondary spillover effects on trade-related supply chain vendors and suppliers,” the research house noted.

CIMB Research’s sector view remains unchanged with a “neutral” rating.

It also retained its “buy” calls on Alliance Bank Malaysia Bhd, Public Bank Bhd and RHB Bank Bhd, as dividend yields remain attractive at current levels.

The research house noted that key upside factors for the sector include lower credit costs, higher net interest margin, and non-interest income gains.

However, the research house added that historical context suggests caution.

Credit costs soared to 79 bps during the pandemic-driven recession in 2020, coinciding with a 5.5% year-on-year gross domestic product (GDP) contraction and an 8.6% drop in exports.

In 2008, credit costs peaked at 70 bps as GDP shrank by 1.5% and exports fell 10.9%.

Typically, credit costs hover between 20 bps and 30 bps in a normal economic cycle.

During a slowdown, this may climb to between 40 bps and 50 bps.

Nevertheless, CIMB Research appeared confident that the sector remained fundamentally sound, with manageable exposure and adequate buffers.