RAM Ratings: Margin upside for banks despite headwinds

Published on 05 Sep 2022.

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RAM Ratings notes a broadening of net interest margins (NIMs) in the latest financial results of eight selected local banking groups, underpinned by the 25-bp hike in the overnight policy rate (OPR) in May this year. The 2Q 2022 results showed the average NIM of banks climbing 5 bps q-o-q to 2.33%. Margins are slated to widen further subsequent to another 25-bp increase in July and two more hikes (of 25 bps each) anticipated by RAM for the rest of 2022. The pace of monetary policy tightening has been faster than we expected at the beginning of the year.

“Loans reprice faster than deposits in a rising interest rate environment. The quantum of margin improvement however may be moderated by intensifying deposit competition as well as a deceleration of current and savings account deposit growth as some customers switch back to fixed deposits. Overall, we expect a y-o-y outperformance of the banking system’s full-year NIM,” 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 2Q 2022.

Higher interest rates may temper credit demand slightly but should not significantly derail the current loan growth momentum. Loans expanded by a strong 5.9% y-o-y in July 2022, partly due to a low base effect as the country came under a strict lockdown in the middle of last year. We are maintaining our earlier conservative loan growth projection of 4.5%-5.0% for 2022.

On the asset quality front, upward inflationary pressure and bigger loan instalments will test some borrowers’ repayment capabilities following the expiry of broad-based, regulatory loan relief measures. Those from vulnerable business sectors, lower income groups and the small-medium enterprise segment may be more challenged. That said, targeted loan assistance from banks remains available to viable customers. After peaking at 28% in December 2021, the eight banks’ average proportion of assisted loans declined sharply to around 5% in July 2022. Delinquencies will continue to inch up in the coming quarters, with the system’s gross impaired loan ratio potentially reaching 2.2% by year end (end-June 2022: 1.79%), which is still a healthy level.

RAM does not envisage provisions rising in tandem with impaired loans in view of the large provisioning buffers built up since the onset of the pandemic. In 2Q 2022, the average credit cost ratio of the eight banks was noticeably lower y-o-y at an annualised 31 bps (2Q 2021: 52 bps) but higher q-o-q. We project the average credit cost ratio to ease to 35 bps in 2022 from 49 bps last year, although still above pre-pandemic levels. Banks will also be judicious with provision reserve releases until a clearer picture of post-relief repayment trends emerges.

While persistently high global inflation and ensuing aggressive interest rate hikes by central banks worldwide will cast a shadow over economic growth prospects, Malaysian banks’ profitability should stay intact. The anticipated margin expansion and tapering of provisioning expenses will lend support to banks’ profit performance even as weaker trading and investment income and the one-off Cukai Makmur (prosperity tax) erase some of these gains.

RAM’s Banking Quarterly Roundup 2Q 2022 can be downloaded at www.ram.com.my.

 

Analytical contact
Wong Yin Ching, CFA
(603) 3385 2555
yinching@ram.com.my

Media contact
Tho Li Ming
(603) 3385 2511
liming@ram.com.my

 

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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