Reported loan growth came in stronger than expected in 2021, reaching pre-Covid levels and beating analysts’ expectations despite a hard-hit economy.

The industry loan growth came in at 4.5 percent for 2021, beating CGS-CIMB’s forecast for 2.5 percent to 3.5 percent.

«With this, the loan growth has normalized to the pre-Covid-19 level of 4-5 percent. The outperformance (vs. our forecast) mainly came from business loans, which expanded by 5 percent in 2021 vs. our forecast of 2-3 percent,» CGS-CIMB analyst Winson Ng said in a note Wednesday.

Hard-Hit by the Pandemic

He estimated every percentage point increase in loan growth would raise 2021 net profit forecasts for banks by around 0.8 percent.
The growth in loans came despite an economy hard-hit by the pandemic.

In November, Malaysia’s central bank reported the economy shrank 4.5 percent on-year in the third quarter, a larger-than-expected contraction, coming in well below a forecast for a 1.3 percent on-year contraction from a «Reuters» poll of economists.

Working From Home

A World Bank study published in September 2021 estimated around 65 percent of jobs in Malaysia can’t be performed from home, after adjusting for internet access, while around 51 percent of jobs there require high levels of physical proximity.

That left Malaysia’s economy particularly vulnerable amid multiple rounds of movement control orders (MCOs) to slow the spread of the Covid-19 virus.

Lower-Income Groups Particularly Hurt

Ng also noted Malaysia banks’ gross impaired loan (GIL) ratio fell for a fourth straight month to 1.44 percent in December from 1.47 percent in November, below his projection of 2 percent, mainly on repayment assistance banks offered to borrowers.
«Better-than-expected loan growth and contained GIL ratio in 2021 paint a positive picture for banks’ outlook. These support our expected continuous recovery in earnings growth,» Ng said. He forecast core net profit growth of 2.3 percent in 2022.

After Relaxation

He also noted that loan application growth has topped 20 percent for November and December after the relaxation of MCOs in the third quarter.
December residential mortgage applications climbed nearly 34 percent on-year, while auto loans rose around 36 percent on-year in December, the note said, adding December loan approvals were also up around 27 percent on-year.

Booked in the Fourth Quarter

However, Ng said the key downside risk to watch for would be 2022’s economic growth, with potential risks also arising from the negative impact of a three-month interest exemption banks offered to «B50» borrowers – or borrowers with monthly income below 5,880 ringgit ($1,406).

That impact could be booked by banks in the fourth quarter of 2021 or the first half of 2022, he said.

In a separate note Thursday from UOB Kay Hian, analyst Keith Wee Teck Keong said the loan growth was «relatively commendable» at 4.5 percent, compared with his forecast for 4 to 4.5 percent.

Ongoing Economic Re-Opening

«The stronger economic growth outlook in 2022 could lend support to a continued loans growth traction where we now expect system 2022 loans growth to come in closer to 5.0 percent vs our initial estimates of 4.5 percent,» Wee said.
Wee said he was positive on the sector.

«The sector remains the best positioned to benefit from the rising interest rate cycle which is only at its early stages, providing positive surprises to net interest margin,» Wee said. «Hefty pre-emptive provisions coupled with the ongoing economic re-opening will lend support to continued improvement in provisions well into 2023 which will help fuel double-digit earnings growth.»