KUALA LUMPUR: Banks will remain cautious on loan approvals as approval rates fell to 40.6 per cent in the first quarter of 2021 compared to 44.1 per cent in the same period in 2020, said MIDF Research.

It said this could be due to higher loan demand as opposed to last year's, as banks may not have been able to keep pace with the approvals.

The banking system loan growth as at end-March 2021 rose at a slightly faster rate of +3.9 per cent year-on-year (yoy) versus +3.7 per cent yoy as at February 2021.

Stronger industry performance was mainly contributed by the higher pace of growth for its top three loans segment, namely mortgage, auto and working capital loans, which expanded +5.5 per cent yoy to RM1.24 trillion from +5.3 per cent yoy to RM1.23 trillion in the previous month.

As with loans demand, MIDF Research said the main drivers for the higher loan approvals were for the purchase of passenger vehicles (+22.7 per cent yoy to RM12.7 billion) and residential properties (+35.6 per cent yoy to RM28.1 billion).

Loans approved for purchase of non-residential properties also expanded strongly at +21.1 per cent yoy growth to RM7.5 billion.

"Again, we view this as an encouraging sign. While banks may still be cautious, we do not believe that it is at a level where credit will be curtailed in the system," MIDF Research said in a research note today.

Meanwhile, Maybank Investment Bank said the upside risks for improving loans growth and lower credit risks were stronger-than-expected economic growth this year due to improved liquidity, which would help sustain interest margins.

However, the downside risks were weaker-than-expected GDP growth, which could lead to slower loan growth and asset-quality issues, potential interest rate cuts that could negatively impact interest margins in the short term; and a slowdown in current account saving account growth, which could exacerbate deposit competition.

-- BERNAMA