AMIDST expectations of slowing loan growth next year, lending to the household sector will continue to dominate with stronger demand from corporates and small and medium-size enterprises (SMEs).

Overall banking system loans registered a growth of 13.2% for the first eight months of the year; however, loan expansion is expected to be moderate next year.

This is despite mitigating factors such as the implementation of large projects under the Economic Transformation Programme (ETP), development of the five corridors under the 10th Malaysia Plan and construction of RM6bil worth of public projects such as schools and hospitals.

 Wahid: ‘We expect a global economic slowdown in 2012 following the eurozone debt crisis and US economic crisis.’

“We are expecting a global economic slowdown in 2012 following the eurozone debt crisis and US economic crisis,’’ says Maybank president and chief executive officer Datuk Seri Wahid Abdul Omar. “This will lead to lower exports and lower demand for credit.’’

Some investors may also delay investing in additional capacity until demand picks up while the underwriting criteria for retail loans may be tightened as part of efforts to curb excessive growth in household debt.

Business loans slowdown?

While government projects are the key drivers of growth, lending to the agriculture and mining sectors would be impacted by the softening of commodity prices, says Alliance Bank group CEO Sng Seow Wah.

“Working capital financing is also expected to slow down due to the decline in global trade, which may not be fully offset by the growth in regional trade,’’ says Sng.

The global economic slowdown will also impact SMEs, which have been the engine of growth. However, government funding schemes for SMEs are expected to cushion some of the impact, says Sng, who projects SME lending at Alliance Bank to register double-digit growth.

Business loans reached a cyclical peak of 14% in the second quarter, driven largely by the rise in commodity prices, notes Nomura Research in its banking sector report.

However, in July, business loan growth showed signs of moderation at 12.2% versus the peak of 13.6% in May.

 Wong: The benign interest rate environment is expected to continue into 2012.

The sustainability of the increase in business loans, as seen over the past few quarters, would depend on how the Malaysian economy weathers the global economic uncertainties, says Malaysian Rating Agency (MARC) vice-president and head of financial institutions ratings, Anandakumar Jegarasasingam.

“Should there be an economic slowdown, going forward, banks may shift their focus towards the household sector. Should economic conditions remain stable, the growth in business loans would be primarily supported by domestic demand directed mostly to infrastructure lending and working capital financing,’’ he adds.

RAM Ratings believes the benign interest rate environment will continue into 2012, making the credit environment still accommodative for borrowers; however, the sovereign problems still brewing in Europe and concerns over deteriorating global growth prospects will likely have a dampening impact on Malaysia’s economic growth stamina, says RAM Ratings head of financial institutions ratings, Wong Yin Ching.

Affordable housing

Household financing facilities now account for about 55% or RM531bil of the local banking system’s loans, with residential property loans comprising close to half or RM258bil of total household loans, says Wong.

 Sng: ‘The country’s economic growth will be primarily driven by domestic demand and ongoing implementation of the ETP.’

Mortgage loans continue to drive lending in the retail segment. “While there was an initial slowdown in mortgage applications following the imposition of the 70% loan-to-value (LTV) cap last November for the third and subsequent home loans, the momentum has picked up again since March this year,’’ she adds.

Banks have been targeting the mid to mid-high-end segment of the market, although repayment ability is still key in assessing mortgage applications, she notes.

Robust growth was also seen in non-residential property loans, given that these properties are not subject to the 70% LTV cap while the imposition of real property gains tax from 5% to 10% for properties disposed within two years is not likely to deter genuine buyers.

According to MARC, mortgage loans grew by 8.3% in the first eight months of the year compared with total loan growth of 8.7% for the same period. As at end of August this year, mortgage loans accounted for 26.8% of total loans in the banking sector, which was in line with the average 26.9% it accounted for over the past five years (2006-2010).

Sng sees sustained demand for medium-cost housing, especially under the My First Home Scheme (MFHS) and 1Malaysia Peoples’ Housing (PRIMA) initiatives. This is coupled with the ongoing implementation of the mass transit railway (MRT) and demand from first-time homebuyers.

However, Sng expects demand for high-end properties, both condominiums and landed properties, at selected locations to soften.

Nevertheless, growth in Alliance Bank’s mortgage lending is expected to be in the high teens, boosted by expansion in its mobile housing sales teams and enhanced loan packages.

Wahid expects housing loans and vehicle financing to grow albeit at a lower growth rate.

“The implementation of the PRIMA affordable housing projects will fill the void expected from the high-end property financing. Property loans for the middle/affordable segments should see a pick-up this year with Government initiatives such as PRIMA and MFHS, provided buying interest remains sustained and developers offer more creative and well-planned projects,’’ he says.

The recent budget announcement of an increase in ceiling price for MFHS from RM220,000 to RM400,000 with 100% loan financing for first-time buyers and stanp duty exemption will promote home ownership among middle-lower income groups.

Further boosting the property market are the Government’s plan to build 7,700 houses, at below market prices, in prime areas and the implementation of “build and sell” concept where instalments would commence after the completion of houses costing RM600,000 and below.

Other loans

Credit card receivables have continued its uptrend, although that has been muted by imposition of service tax and stricter eligibility criteria.

“Slower growth in credit card receivables have been more than compensated by strong growth of an annualised 19.5% to RM48bil in personal financing,’’ notes Wong. “Some banks have been growing their personal loans for better yields due to the rife competition in the residential property loan segment which suffers from razor thin margins.’’

Maybank expects much slower growth for personal loans, given potential tightening of underwriting standards.

“Although personal loans and credit cards have registered growth rates of 13% and 4.5% respectively in the first eight months of the year, their growth rates may moderate, going forward, as a result of possible further tightening of regulations to control household indebtedness,’’ says Anandakumar of MARC.

Growth in auto loans, which rose by 4.4% in the first eight months of the year, has been below the historical growth trajectory, he notes.

However, he does not think that the near-term growth prospects for auto loans would be significantly impacted, considering the still limited public transport facilities in Malaysia.

Demand for construction loans will depend on successful and timely implementation of ETP projects; for the first eight months of the year, construction loans contracted by 0.9% compared with the compounded annual growth rate of 5.5% between 2006 and 2010, says Anandakumar.

Higher demand for project financing and construction loans from ETP projects is expected to compensate for slowing demand from manufacturing and export-oriented industries, says Wong of RAM Ratings.

Economic outlook

Maybank’s real gross domestic product (GDP) forecast has been revised to 4.5% for this year and 3.5% to 4% for next year, based on the current implementation of various ETP projects.

“Should these projects be implemented faster, we can expect the GDP growth rate for 2012 to move higher than 4%,’’ says Wahid. “On the other hand, should the global economy worsen further leading to a sharp decline in commodity prices, then the GDP growth rate is expected to be at the lower end of the range.’’

While it is difficult to come up with a forecast on next year’s loans growth, Anandakumar sees the worst case scenario to be at least between 6% and 8%.

Alliance Bank is confident of registering loans growth of 7% to 8% for its next financial year ending March 31, with loans portfolio focused on consumer and SME lending.

‘‘The country’s economic growth will be primarily driven by domestic demand and ongoing implementation of the ETP – two sectors which are expected to be least impacted by external developments in the United States and Europe,’’ says Sng of Alliance Bank.