This article first appeared in The Edge Financial Daily on April 2, 2019 - April 8, 2019

KUALA LUMPUR: Malaysia’s banking sector is witnessing a deceleration in demand for funds, resulting in declining growth of Malaysia’s broad money supply (M3) and slower loan growth in February, said analysts.

They noted that M3 growth declined for the second consecutive month to 6% in February, from 6.6% in January, due to a deceleration in demand for funds from the public and private sectors.

However, a slower decline in foreign operation funds partly mitigated the M3 decrease, RHB Research economist Vincent Loo Yeong Hong said in a research note yesterday.

“The growth of narrow money supply moderated to 0.5% year-on-year (y-o-y) from 1.6% in January amid a quick deceleration in the growth of currency in circulation,” he added.

Meanwhile, loan growth had decelerated to 5% y-o-y as at end-February versus 5.5% in January — the third consecutive month of deceleration, according to Bank Negara Malaysia’s (BNM) “Financial Stability Report 2018”.

Corporate and household sectors contributed to the decrease in loan growth. Corporate loan growth moderated 4.7% y-o-y in February, from 5.4% in January, due to fewer loans given to the mining, real estate, agriculture and utility sectors.

However, this was mitigated by sustained demand for loans in some sectors — manufacturing, wholesale and retail, construction, financial and business services, transport and storage — said Loo.

Household-sector loans also decreased further in February to 5.2% y-o-y, from 5.5% in January, constituting six consecutive months of declines after peaking in August 2018.

This followed the banking sector’s winding down of residential property loans, as well as reductions seen in consumer loans such as car loans, leading to consumption credit dipping to 1.8% y-o-y from 2.1% last year.

“The industry’s loan base grew a lacklustre 0.1% in the first two months of 2019. This reaffirms our expectation of a slowdown in loan growth from 5.6% in 2018 to a projection of about 5% in 2019,” CIMB Research said in a note yesterday.

TA Securities has also forecast a loan growth of 5% for the year, while AmInvestment Bank’s projection is between 4% and 5%, according to their research reports yesterday.

Comparatively, Loo expects loan growth to “remain healthy” at 5.2% this year compared with 5.6% in 2018.

Notably, most publicly listed banks have set loan growth targets of above 5% for this year — for example, CIMB Group Holdings Bhd’s 6% and Malayan Banking Bhd’s system loan growth of 5.1%.

CIMB Research analyst Winson Ng opined that weak loan applications and approvals in the first two months of 2019 bode ill for overall loan growth of Malaysia’s banking sector for the next one to two months.

“We still rate Malaysian banks as ‘neutral’ given concerns over margin erosion and an uptick in credit costs,” Ng said, although he cited that the dividend yield is attractive at a projected 4.1% this year.

Loo opined that BNM would keep its overnight policy rate unchanged at 3.25% in 2019, although the space for monetary easing has grown considerably given that other central banks are moving away from a monetary tightening stance.