RAM Ratings: Bank margins battered in 2023

Published on 06 Mar 2024.

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Malaysian banks saw steep margin compression and increased operating expenses in 2023 which were partly balanced by stronger non-interest income and lighter provisioning charges. The average pre-tax return on assets and return on equity of eight selected local banks was lower at 1.36% and 13.6%, respectively (2022: 1.41% and 14.0%). At the after-tax level, however, the absence of the one-off Cukai Makmur lifted profitability metrics higher compared to the year before. 

The average net interest margin (NIM) of the eight banks narrowed by 28 bps to 2.07% – the lowest level seen in the last five years. While multiple overnight policy rate (OPR) hikes initially resulted in considerable margin expansion in 2022, banks have had to grapple with the higher cost of funding in the past year as deposits gradually repriced upwards. Stiffer competition for deposits and the expiration of forbearance allowing the use of government securities for statutory reserve requirement compliance exacerbated the pressure on margins. 

“As we expect the OPR to be kept unchanged this year, NIMs are anticipated to stay steady although modest compression is possible should deposit competition intensify,” says Wong Yin Ching, RAM Ratings’ Co-head of Financial Institution Ratings.

Domestic loans grew by a fairly strong 5.3% in 2023. Lending momentum was tepid for much of the year but accelerated in 4Q, led by businesses. Early signs of a recovery in global trade and the robust job market are expected to support loan demand this year. However, as we remain watchful of challenges in the global macroeconomic environment, elevated cost pressures and petrol subsidy retargeting, loan growth for 2024 is projected to ease somewhat. 

On the asset quality front, in view of lower reported provisioning expenses in 2023, the average credit cost ratio of the eight banks improved from 30 bps to 23 bps. A large portion of management overlays set aside during the Covid-19 pandemic remains on bank balance sheets. 

”Looking ahead, banks’ profitability should stay intact in the coming year but upside will be limited in light of prevailing uncertainties in the operating landscape,” Wong adds.

RAM’s Banking Quarterly Roundup 4Q 2023 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 - 4Q2023 06-Mar-2024 Banking Quarterly Roundup View PDF