RAM Ratings: Bank margins to narrow in 2023

Published on 06 Mar 2023.

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Malaysian banks registered better profit performances in 2022, underpinned by net interest margin (NIM) expansion, lighter loan provisioning expenses and tight cost management. “Following the strong showing in 2022, profit outperformance this year will be relatively limited as further easing of impairment charges would be offset by margin compression and some moderation in loan growth,” 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 2022. “At the after-tax level, however, banks should see some upside due to the absence of the one-off Cukai Makmur,” she said.

On the whole, the aggregated pre-tax profits of eight selected local banking groups climbed 22% last year (after adjusting for entity-specific exceptional items), surpassing the pre-pandemic level in 2019. “The four 25-bp hikes in the overnight policy rate (OPR) gave banks a shot in the arm in 2022, broadening the average NIM of the eight banks to 2.35% (2021: 2.28%). Notwithstanding another potential OPR increase, NIMs will be squeezed in 2023 by the rising cost of funds from the full impact of deposit repricing, keener deposit competition, and continued normalisation of current and savings account balances. Another factor will be the expiration of the flexibility to use government securities to meet the statutory reserve requirement at the end of 2022,” Wong adds.

As at end-December 2022, the system’s gross impaired loan ratio clocked in at a still-low 1.72% (end-December 2021: 1.68%). The average credit cost ratio declined notably to 29 bps in 2022 from 48 bps the year before, given sizeable management overlays set aside in the previous two years. Based on the latest quarterly results briefings of the eight banks, 2.7% of loans were under repayment relief programmes. Although bad loans will likely creep up in the coming quarters as remaining relief measures gradually expire, we anticipate the credit cost ratio to ease further in 2023 as some banks may partially write back management overlays. Even so, these banks are judiciously assessing prevailing macroeconomic headwinds and the repayment trends of their loan portfolios to determine the quantum of reversals.   

RAM’s Banking Quarterly Roundup 4Q 2022 can be downloaded at www.ram.com.my.

 

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