KUALA LUMPUR (Sept 10): Malaysia’s slowing economic growth will sap corporate demand for loans while smaller businesses are at risk from higher tariffs and supply chain disruptions, said S&P Global Ratings.

Risks are firmly on the downsides, the ratings agency said in a report. However, domestic banks are facing external risks from a position of strength and will be able to handle modest increases in bad debts from small and medium enterprises (SMEs) as well as low-income households, the agency noted.

“Other key factors to watch are consumer sentiment and spending, which, if hit, could affect corporate revenues,” S&P said in a note.

Data out last month pointing to steady economic expansion in the second quarter with robust domestic demand, the main engine of growth, cushioning deceleration in exports.

In July, Bank Negara Malaysia cut the policy rate in a pre-emptive move to preserve growth prospects. A month earlier, the central bank slashed the statutory reserve requirement, which stipulates the amount of cash that lenders must set aside as buffers, to the lowest in 14 years.

Malaysia’s banking sector will see slower loan growth of 4%-5% over the next two years, compared with 5.5% in 2024, according to S&P’s estimates. Non-performing loans, meanwhile, could rise 20 to 25 basis points to 1.6% by the end of 2026, mostly coming from SMEs and low-income households.

“While [US] tariff policies are much clearer, we still expect corporate demand to remain soft because of tough external conditions, which could delay expenditure plans,” the agency flagged.

Still, S&P is taking comfort in strong balance sheets among Malaysia’s corporates and households should cushion against downside risks.

Malaysia’s household sector, which makes up 60% of banks’ loan books, should be able to withstand external volatility with regulations curbing over-borrowing while household financial assets are more than twice the level of household debt, the agency said.

Competition will stay intense for both loans and deposits, weighing on profitability, S&P warned, highlighting that the price war is especially fierce in mortgage finance that forms about 40% of the sector's loan portfolio.

Malaysia is home to more than 30 million people with around three dozen local and foreign lenders jostling for business.

To soften the blow from elevated rates of deposits, the agency took note that large banks are increasingly tapping interbank borrowings and long-term debt issuance in wholesale markets that offer cheaper funding than fixed deposits of similar durations.

“Banks are also stepping away from very expensive wholesale deposit deals and doubling down on their efforts to raise retail deposits,” the agency said, adding that the trend of tapping alternate sources of funding and cutting expensive deposits will keep deposit growth lower than loan growth.