In its “Global Banks Country-By-Country Outlook 2025: Cautiously Confident” report, S&P Global said the industry’s non-performing loan ratio could rise by 20-25 basis points (bps) by the end of 2025 from 1.6% as of end-June 2024.

“This could come from restructured loans, especially to low-income households and small to midsize enterprises.

“Any further rollbacks in fuel subsidies would have a further impact on these two vulnerable groups.

“The level of restructured loans has diminished steadily and stood at about 2% at end-June 2024,” the report said.

S&P Global said the credit costs should stay at 15-20 bps, similar to the pre-pandemic average, given adequate provisioning.

It said net interest margins could decline by three to five bps due to intense competition for both loans and deposits.

“Over the next two years, we forecast return on assets to stay at 1.2%-1.3%

“Upside potential to profitability could come from lower credit costs if large banks choose to write back pandemic-related provisions,” it noted.

Moving forward, S&P Global said Malaysian banks’ asset quality is closely correlated to employment levels, given a large share of household loans.

“High household leverage poses some risk. However, stable employment and adequate household financial assets are mitigating factors,” it said.

Regarding the property sector, S&P Global said banks have material exposure to real estate development and construction at about 8% of total loans.

It said oversupply in the commercial real estate market and elevated office vacancy rates remain structural challenges.

“Banks have been cautious in lending to the sector and have gradually reduced exposure,” it said.