BNM measures start to work as loan approvals contract

KUALA LUMPUR: Bank Negara Malaysia’s (BNM) tightened guidelines on consumer lending have started to work. Banking indicators have started to show a contraction in loan applications and approvals in January, while loan growth has moderated.  

While the statistics are an indicator that the central bank’s prudent measures are starting to work and will rein in household debt, it would also impact growth for banks and the wider economy.   

Annual loan growth for the banking sector moderated to 12.1% in January from 13.6% in December due to slower growth in household loans, which moderated to 12.3% from 12.9% in December.

Meanwhile, business loan growth also moderated to 11.8% from 14.5% in December, as businesses turned more cautious.

Loan applications fell 2.7% in January compared with a 10.7% growth in December.

This reflected a 16.4% contraction in consumer loans, particularly for car purchases and residential property which fell 15.5% and 6.3% respectively.

Similarly, loan approvals declined by 2.9% against 11.3% growth in December. Loan approvals plunged 24.4% for the household sector.

“Loan indicators for January provide tentative confirmation of a slowdown in loan growth. Despite the central bank’s repeated assertions of financing availability, we expect this year’s loan growth to be a modest 9% to 10%, consistent with cautious business and consumer sentiments in an environment of slowing economic growth,” said Lee Heng Guie, head of economic research, CIMB Investment Bank, in a report.

Loan approvals are seen as a leading indicator for the banking sector and the economy, as it will translate into lower credit creation and economic activities in future months.

CIMB noted that the annual growth of the leading indicator was at its lowest level in 30 months, suggesting that the Malaysian economy will expand at a more modest pace in 1Q12 following 4Q11’s 5.2% year-on-year (y-o-y) growth.

However, Lee added that the lending data was still distorted and inconclusive as January was a relatively short month due to the Chinese New Year holidays.
He said loans growth would still be supported by the business segment as ETP projects are being rolled out.

Consequently, Lee viewed the new guidelines as a prudent measure to rein in household debt, which expanded at a rate of 11.7% per annum between 2003 and 2011 to an estimated RM664.7 billion or 78% of GDP at the end of December 2011.

While anecdotal evidence suggests banks have already been more stringent in granting out consumer loans in recent months, these statistics appear to support that proposition.

RHB Research Institute, in a recent report, said loan approval rates have been trending down, which suggest that banks have already raised their credit underwriting standards.

“On the whole, while we think the new guidelines would have some impact on household loan growth ahead, the extent of the impact remains to be seen,” it said in a recent report.

Anthony Dass, MIDF chief economist, believed that Bank Negara’s measures can be viewed positively as the tightened guidelines have the effect of reducing banks’ credit risk exposure, which could effectively mitigate a currency crisis.

“We usually will look at loan growth to GDP, and the components of the loans which we deem as unproductive, as a precursor to a currency crisis,” he told The Edge Financial Daily.

It was the rapid rise in US household debts which sparked the subprime crisis and subsequent global credit crunch.

Despite softer growth in lending indicators, banking analyst Cheah King Yoong of Alliance Research has on “overweight” call on the banking sector.

“Premised on our conviction that the underlying fundamentals of the domestic banking sector remain solid, we expect the near term earnings prospect of the major domestic banks to stay robust,” he said in a recent report.

In fact, Cheah believes that consensus earnings for banks in 2012 have been largely conservative and provided room for positive earnings surprises and potential earnings upgrades.

“The banking system remains well-capitalised, with risk-weighted capital ratio and core capital ratio at 14.8% and 12.9% respectively. This implies the domestic banking system is resilient to withstand unanticipated shocks to the financial system, if any,” he added.

A banking analyst from Hong Leong Investment Bank agrees that one should not worry about the outlook for Malaysian banks.

“Even if loan growth slows, it shouldn’t affect banks adversely because their loan bases are very big,” he said.

He explained that as long as non-performing loans do not rise sharply, banks would still be profitable despite a slowing growth rate.

Despite the global economic uncertainties in 2H11, asset quality for the banks in January remained sound with net impaired loans and loan loss coverage staying strong at 1.9% and 96.6% respectively.

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