ETP & 10 MP - Malaysia Corporate loans growth to continue

ETP, 10MP projects need financing, say industry leaders

PETALING JAYA: Corporate loans growth fuelled by working capital loans is expected to continue its upward trend this year supported by the multitude of projects under the Economic Transformation Programme (ETP) and the 10th Malaysian Plan (10MP).

At the same time, household loans are expected to grow at a slower rate due to financing restrictions on third residential properties and in anticipation of higher interest rates in the latter part of the year.

OCBC Bank (M) Bhd country chief risk officer Choo Yee Kwan said depending on the business sentiment, the bank generally expected working capital loans to still account for the lion's share of loans demand given the financing requirements of the entire construction and oil and gas value chains in undertaking the multitude of projects to be rolled out under the 10MP and ETP.

Further more, he added, the prevailing escalating prices of commodities had raised the input costs across a broad cross-section of industries which would entail higher working capital financing even for one to undertake the same level of production activities.

Malaysian Rating Corp Bhd (MARC) vice-president and head of financial institution ratings Anandakumar Jegarasasingam said in view of the corporate financing patterns in Malaysia, working capital financing would continue to be an important component of the corporate loans portfolio of the banking sector.

Given the short-term nature of working capital facilities, he said it was also a preferred business for most banks which tended to be far more cautious in lending to projects with longer repayment periods.

He, however, felt a major shift away from consumer loans was unlikely in the near term as the credit origination and credit appraisal mechanisms of the banking sector had over the years been geared more towards consumer financing.

But, over the medium term, Anandakumar noted a repositioning might occur if the financing needs of the projects linked to the ETP were financed by the banking sector.

RAM Ratings head of financial institution ratings Promod Dass agreed that loan growth this year would also be spurred by corporate loans demand stemming from funding requirements of ETP-related projects.

“We are likely to see household loans growing at a slower pace, given the 70% maximum loan-to-value ratio on third and subsequent home financing to curb speculative activities. That said, the banking system's proportion of household to non-household loans is expected to remain steady, at approximately 55:45,'' he told StarBiz.

Loans applications recorded a robust growth of 36.6% in December 2010 compared with December 2009, much higher than the 13.3% year-on-year rate registered in November 2010, driven mainly by the working capital segment, which grew by a sizzling 117.2% year-on-year in December 2010 as opposed to 30.1% year-on-year in November the same year.

In terms of loans approved, growth rebounded to 17.4% year-on-year in December last year from 4.7% year-on-year in November backed by working capital loans segment growth, which spiked 93.2% in December from 49.8% in November.

Meanwhile, a senior banking analyst from a foreign research house said she expected corporate loans to only marginally outpace consumer loans growth due to the robust bond market as companies preferred to tap funds from bond issuance rather than bank loans.

On the prospect of non-performing loans this year, Ernst & Young Assurance Advisory Services partner Chan Hooi Lam said both gross and net impaired loan ratios were expected to improve this year due to the better economic outlook.

“The benefit of better outlook should have already been reflected in the banks' December 2010 numbers for loan-loss provisioning although it is not obvious from the gross and net impaired loan ratios compared with last year's,” he said.

“Banks in Malaysia have adopted more stringent classification rules since January 2010 under FRS 139, where generally more loans are classified under the impaired' or non-performing' category compared with before.

“Since January 2010, other credit quality factors have been considered in classifying loans as impaired' in addition to aging of loans previously.”