COMPETITION for bank deposits in Malaysia will trim lending margins for the country’s banks this year while most of the sector’s other metrics look to be stable or improving.
The new drags are coming from higher interest rates which are reducing borrowing appetite and are feeding into bank funding costs, according to S&P Global Ratings.
“(On the hindsight), asset quality risks appear to be easing for Malaysian banks as underlined by 1Q 2023 results,” observed the international credit rating agency’s credit analyst Nikita Anand.
“Overall, the country’s rated banks can maintain good profitability despite declining margins. This and a reasonable pace of credit growth support healthy capitalisation,”
With deposit competition to weigh on the margins, Malaysian banks could see a 10-20 basis points compression in margins in 2023 due to price competition for fixed deposit rates. During 1Q 2023, net interest margins for rated banks fell sharply.
“This reflects the steady outflow from savings deposits into higher-yielding fixed deposits,” noted S&P Global Ratings.
“AMMB Holdings Bhd was an exception to the trend, improving its share of low-cost deposits through promotional offers. For the large rated Malaysian banks, the outflows have been more acute in their Singapore operations, and partially indicates a lower share of sticky retail deposits in Singapore.”
Over the next three quarters, the international credit rating outfit expects some stabilisation in Malaysia’s deposit rates with early signs of a moderation already visible. Banks’ efforts to tap low-cost deposits from corporates and small businesses could help offset the pressure on margins.
Given the persisting pressure, credit growth in Malaysia has begun to decline slightly in the 1Q 2023 compared with 6% in 2022. This is given the economic slowdown and higher interest rates are reining in credit demand.
“We expect GDP (gross domestic product) growth of 3.2% in 2023 and 4.7% in 2024 after a sharp post pandemic rebound of 8.7% in 2022,” projected &P Global Ratings.
The international rating agency further expects loan growth in banks’ overseas operations to see a more pronounced slowdown.
“Both Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd reported minor contractions in their Singapore loan portfolios in the first quarter,” it pointed out.
“This in our view is due to higher funding costs muting credit growth. Asset quality overhangs in certain pockets such as construction and property loans in Southeast Asia could result in more cautious lending in those markets.”
At the end of the day, S&P Global Ratings expects profitability of Malaysian banks to stay flat in 2023.
“We expect lower credit costs and a normalised tax rate to offset the decline in lending margins. As such, we forecast the sector’s return on assets will stay at about 1.4%. Good profitability, reasonable credit growth, and dividend payout should support healthy capitalisation,” it added. – June 5, 2023
