Malaysian banks are heading into 2023 with their loan books still growing, but the easy gains are gone. Hong Leong Investment Bank Research cut its rating on the sector to “neutral” this week, a downgrade that tells the story of an industry caught between fading tailwinds and rising costs.
The headline number looks fine. Loan growth for October 2022 held at 6.5%, unchanged from the prior period. Household lending rose 6.3%. Commercial lending rose 5.5%. Across every sub-segment of household borrowing, there was an increase. On the surface, nothing is broken.
But the research firm’s analysts see trouble beneath that steady figure. They pointed to fewer interest rate increases expected next year, fierce competition for deposits, and a softer macroeconomic outlook. Those three pressures, they said, make the sector less attractive to investors now, even though stock valuations remain undemanding.
Deposit competition is the most immediate headache. Banks are fighting harder for the money they lend out, which squeezes margins. At the same time, rates on savings and current accounts are declining. That combination — paying more to attract deposits while earning less on the money already sitting in accounts — is a direct hit to profitability.
Costs are not cooperating either. Staffing and technology expenses are sticky, meaning they do not fall when revenue slows. Banks have invested heavily in digital systems and hired to compete. Those bills keep coming due regardless of what the economy does.
Macroeconomic overlays are growing. That is bank-speak for setting aside more money to cover loans that might go bad if the economy weakens. And asset quality faces new challenges in the coming year — a warning that defaults could rise after a long period of relatively clean books.
This is not a sudden crisis. Banking stocks have been considered safe investments even as economic difficulties loom. The industry can still boost non-interest revenues — fees, commissions, and other charges that do not depend on lending. That gives them some buffer. But the tailwinds that carried the sector through recent years are fading, and the headwinds are getting stronger.
The downgrade from HLIB Research is a measured call. They are not saying banks are in danger. They are saying the easy conditions that made the sector a clear buy are over. Neutral means hold what you have, but do not expect the same ride upward.
Malaysia’s banking industry has been a reliable performer. It went through the pandemic without the kind of loan losses many feared. Government support programs and payment moratoriums kept borrowers afloat. Central bank rate hikes this year helped boost net interest margins. Those factors are now playing out.
What comes next depends on how deep the economic slowdown goes. If growth softens only modestly, banks can manage. If it turns sharper, the combination of deposit competition, cost stickiness, and rising provisions will bite harder. The research firm’s analysts are betting the pressures will be real, if not catastrophic.
For investors who piled into banking stocks during the recovery, the message is simple: the easy money has been made. The sector remains safe, but safe is not the same as exciting. And in a market where tailwinds are fading, safe may be enough — or it may not be.
