Easing SME loan demand could frustrate Malaysian banks

MALAYSIAN banks cannot afford for corporate lending to flag, if the sector is to uphold the current pace of loan growth, a Maybank Kim Eng report has warned.

But, in good news for borrowers, banks' net interest margins will likely stay squeezed in 2019.

Based on ongoing loan application trends, analyst Desmond Ch'ng expects moderating loan growth in Malaysia this year, on the back of softer household and personal loans, as well as weak demand from small and medium-sized enterprises (SMEs).

SME lending - which makes up 18 per cent of banks' loans - has been weak, he said, pointing to year-on-year growth of just 2.1 per cent as at end-September 2018.

But "guidance from the larger corporate banks such as Maybank, CIMB and RHB points to a still healthy corporate loan pipeline", Mr Ch'ng added.

"The main challenge is in encouraging companies to draw down on their loan facilities."

He also warned of risks from banks' remaining exposure to construction and real estate, as well as the troubled oil and gas (O&G) sector. "The volatility in oil prices is of some concern, as is the fact that several domestic O&G companies have been or will be restructuring their loans."

Meanwhile, demand for home loans is expected to ease, based on slowing applications. And ccar hire purchases are expected to be subdued, with the re-introduction of goods-related taxes.

This could eat into household loans, which averaged growth of between 5 per cent and 6 per cent in 2017 and 2018 and offered a bulwark against a slowdown in commercial property loans.

Even as applications suggest a coming pick-up in commercial property loans, Mr Ch'ng said that the momentum is unlikely to be sustainable, "given that banks are likely to remain cautious amid an over-supply of office space, shopping malls and shophouses in selective areas".