RAM: Malaysian banks on steady footing despite external pressures

RAM Ratings maintains a stable outlook on the Malaysian banking sector in conjunction with the release of its latest sector commentary, Banking Insight 2025 – Maintaining Momentum.

While uncertainties from US protectionist measures and ongoing geopolitical tensions could spill over to the domestic economy, it is still too early to assess the full extent of these effects. With the US and China being key trading partners of Malaysia (approximately 14% of Malaysia’s total value-added production), the retaliatory tariff contest may dampen the positive trade momentum and Malaysia’s growth trajectory.

“Despite these external challenges, we anticipate banks’ credit profiles to hold steady. Banks are also entering the year in strong shape, with still-solid capital buffers and asset quality at its most robust ever,” said Wong Yin Ching, RAM’s Co-head of Financial Institution Ratings.

Key expectations:

RAM’s GDP growth expectation of 4.0%-5.0% for 2025 (2024: 5.1%), though slower, will be driven by domestic demand given favourable labour market conditions and accommodative interest rates.

Investment activity will gain from progress on multi-year infrastructure projects and greater realisation of record-high levels of approved investments last year, as well as the ongoing rollout of catalytic initiatives under the national master plans. These factors are likely to stimulate business lending. On the retail front, home financing will continue to be a major growth contributor while auto lending is anticipated to normalise in line with the lower total industry volume forecast for 2025. “Beyond these, the overall loan growth trajectory will also inevitably depend on how global external risks and domestic adjustments to fuel subsidies and electricity tariffs unfold,” Wong adds.

On the asset quality front, the weighted average credit cost ratio of eight selected local banks rated by RAM eased further to 18 bps in 2024 (2023: 23 bps). Banks’ loan loss coverage (with regulatory reserves) is strong, with the average of the eight banks improving to 143% as at end-2024 (end-2023: 134%) “Malaysian digital banks are also making a nascent mark on the industry, with all three operational banks ramping up deposit gathering efforts over the past year, driven by high-interest savings accounts,” said Sophia Lee, RAM’s Co-head of Financial Institution Ratings. Digital banks have also recently expanded their services to include lending, strategically focusing on specific customer segments.

Expectedly, all three digital banks are still far from breaking even, with quarterly trends indicating that losses have yet to peak in view of high set-up costs. “The key hurdle for these banks lies in retaining tech-savvy and price-sensitive customers in a competitive market while managing acquisition costs and scaling up without assuming significant risks. Shareholders have so far demonstrated strong financial support, with all three players receiving additional capital injections in 2024,” Lee adds.

RAM’s Banking Insight is available for download at www.ram.com.my.