RAM Ratings: Following strong rebound last year, banks’ core earnings to see mild upside in 2022

Published on 08 Mar 2022.

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Malaysian banks’ profit performance staged a strong recovery in 2021, buoyed by broader net interest margins (NIMs), lighter loan provisioning expenses and disciplined cost control. Core earnings before tax in 2022 are expected to improve marginally, underpinned by more moderate impairment charges. Bottom lines will however be weighed down by Cukai Makmur, the one-off prosperity tax.  

“Significantly smaller modification losses and the full-year effect of lower deposits rates saw the average NIM of eight selected banks swell by 22 bps to 2.28% in 2021. Despite the likelihood of an overnight policy rate hike in 2H 2022 and the absence of modification charges, we expect NIMs to be held broadly stable, given the continued tapering of current and savings account deposits growth from a peak in early 2021,” highlights Wong Yin Ching, RAM’s co-head of Financial Institution Ratings, in conjunction with the publication of the rating agency’s Banking Quarterly Roundup 4Q 2021.

Based on the latest quarterly results briefings of the eight banks, about 15% of loans were under repayment relief programmes – almost half the proportion the previous quarter. The average credit cost ratio of the selected banks declined notably to 50 bps in 2021 from a lofty 84 bps the year before. With the bulk of relief programmes under the Pemulih fiscal package being wound down in 1Q 2022, defaults will likely trend up in the coming quarters. On that note, banks had bolstered their loss absorption buffers since the start of the pandemic by proactively setting aside more provisions through management overlays. We have pencilled in a slightly lower credit cost ratio of 40 bps-50 bps for 2022 based on our conservative assumptions, which is still higher than the pre-pandemic five-year average of 31 bps. 

The banking system’s loans grew at a faster pace of 4.5% in 2021, surpassing the 3.4% and 3.9% growth rates recorded in 2020 and 2019, respectively. Loan expansion was tepid in mid-2021 following the imposition of a stricter lockdown nationwide. However, pent-up demand and a gradual reopening of the economy in 4Q 2021 led to a strong rebound in credit growth. 

Over the last two years, banks have been judicious in discretionary spending, which resulted in lower operating expenses. We expect some of the spending – particularly on digital infrastructure – to resume this year, gradually nudging up the cost to income ratio from 44.1% currently (2020: 45.6%; 2019: 47.3%).

On the whole, the aggregated pre-tax profits of the eight banks surged 42% in 2021 (after adjusting for entity-specific exceptional items), reaching the level achieved pre-pandemic in 2019. Seven out of eight banks reported improved profit performances with an overall average return on assets of 1.25% last year (2020: 0.92%). Considering the high base effect, profit outperformance this year will be relatively limited. Lingering COVID-19 risks and second-order effects from the escalating Russian-Ukraine conflict further cast some degree of uncertainty over banking growth prospects. 

RAM’s Banking Quarterly Roundup 4Q 2021 can be downloaded at www.ram.com.my.


Analytical contact
Wong Yin Ching, CFA
(603) 3385 2555


About RAM Rating Services Berhad (RAM Ratings)

Established in 1990, RAM Ratings is a leading credit rating agency registered under the Securities Commission’s Guidelines on Registration of Credit Rating Agencies, 2011. In addition to the provision of credit ratings for corporate bonds and sukuk and their issuers, RAM Ratings also provides research and publications on Islamic finance, fixed income and macro-economic and industry analysis as well as data analytics relating to credit risk, counterparty assessments and other related domains. 


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Publication Date Published Category
Banking Quarterly Roundup - 4Q2021 08-Mar-2022 Banking Quarterly Roundup View PDF