Kuala lumpur: Malaysia’s banking sector is poised to withstand ongoing global trade tensions and slower economic growth, bolstered by a robust labor market and stable household finances.
According to BERNAMA News Agency, S and P Global Ratings affirmed that banks in Malaysia are navigating these challenges effectively, with active management of funding costs expected to offset increased competition. The strength of retail deposit franchises is highlighted as a significant differentiator for banks.
The rating agency projects a slowdown in loan growth, estimating it at 4.0-5.0 percent over the next two years, compared to 5.5 percent anticipated in 2024. For the first half of 2025, corporate loan growth has moderated to 3.4 percent amid uncertainties related to tariffs. Despite clearer tariff policies, corporate demand is expected to remain subdued due to challenging external conditions, potentially delaying expenditure plans. Some corporations are exploring bond markets as an alternative, encouraged by lower interest rates.
Infrastructure and data center projects, particularly within the Johor-Singapore Special Economic Zone (JSSEZ), are identified as potential growth and profitability drivers. S and P Global noted that even if local banks are not directly financing these projects, they can still benefit from fee income through deal arrangements or syndications.
In contrast, retail credit growth is expected to outpace corporate lending, primarily driven by housing and car loans. S and P Global anticipates steady annual loan growth in the retail segment, supported by a low unemployment rate and rising wages. Banks are also enhancing offerings in wealth management and foreign exchange transactions to boost non-interest income, which is favorable for long-term profitability. A focus on small-to-midsize enterprises (SMEs) is also seen as a strategy to improve risk-adjusted returns and maintain stable profitability.
Sector-level loan-to-deposit ratios (LDR) are projected to increase to 90-95 percent over the next two years, with Islamic banks’ financing-to-deposit ratios expected to remain above 100 percent due to higher financing growth and a larger share of wholesale deposits. Strong labor market conditions, along with proactive restructuring and write-off policies among banks, are expected to help maintain low non-performing loan (NPL) ratios.
The direct impact of higher tariffs on the banking sector is anticipated to be minimal, as trade-related exposures constitute only 3.5 percent of total loans. Exposure to export-oriented SMEs with significant US market presence is also limited. However, SMEs remain vulnerable to higher tariffs and potential supply chain disruptions. S and P Global forecasts a modest increase in NPLs by 20-25 basis points by the end of 2026, reaching 1.6 percent, driven by pressures on SMEs and low-income households.