Published on 07 Dec 2023.
The Malaysian banking industry’s asset quality remains robust and resilient. This is seen in the system’s gross impaired loan (GIL) ratio of 1.72% as at end-September 2023, which is unchanged from end-December 2022. In 3Q 2023, lighter provisioning expenses offset slightly weaker treasury and markets-related income while net interest margin (NIM) held steady compared to the preceding quarter. The most recent quarterly results announcements show banks’ profitability to be still sound overall, with the average pre-tax return on assets of eight selected local banks at 1.37% (2Q 2023: 1.39%; 2022: 1.42%).
“In 3Q 2023, the average credit cost ratio of the eight banks improved to an annualised 19 bps q-o-q (2Q 2023: 25 bps; 2022: 29 bps). Although we continue to see some management overlay releases at a few banks, a major portion of these provisions built up during the pandemic was either maintained or reassigned to various loan portfolios. Banks are prudently assessing the macroeconomic landscape before determining the amount of writebacks, if any,” says Wong Yin Ching, RAM’s co-head of Financial Institution Ratings, in conjunction with the publication of the rating agency’s Banking Quarterly Roundup 3Q 2023.
Higher loan instalments and elevated cost pressures may result in an uptick in delinquencies over the coming quarters. These are expected to stem from pockets of borrowers especially those who are highly leveraged or small and medium-size
enterprises in vulnerable business sectors. However, we foresee the deterioration to be manageable, anticipating an industry GIL ratio of below 2% in 2023. The debt servicing ability of individual borrowers continues to be supported by strong labour market conditions – the unemployment rate, at 3.4%, is close to pre-pandemic levels.
Following three consecutive quarters of contraction, margins saw some reprieve in 3Q 2023. The average NIM of the eight banks stayed stable q-o-q at 2.08%. Easing competition for deposits and the 25-bp overnight policy rate hike in May had lifted some pressure off NIMs during the quarter. This could be shortlived as deposit competition will likely pick up again as banks move into the fourth quarter. Newly operational digital banks may also intensify competition. GX Bank Berhad is the first digital bank to come on stream.
The banking system’s loan growth eased to an annualised 4.1% in 9M 2023 following strong expansion of 5.7% last year. For the full year, we expect profit outperformance to be relatively limited as lower provisions would be counterbalanced by narrower NIMs and moderating domestic loan growth. At the after-tax level, however, banks should see some upside from the absence of the one-off Cukai Makmur.
RAM’s Banking Quarterly Roundup 3Q 2023 can be downloaded at www.ram.com.my.
Wong Yin Ching, CFA
(603) 3385 2555
(603) 3385 2500
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