MALAYSIAN banks can ride out tougher conditions this year amid a slowdown in the country’s growth rate and weaker borrowing appetite.
This is according to a chart-book style report by S&P Global Ratings entitled “Malaysian Banks Outlook 2023: Prepared for Tougher Conditions”.
“Higher funding costs will drag on credit demand in Malaysia,” projected S&P Global Ratings credit analyst Nikita Anand. “Credit growth could slow to 4%-5% from 6% in 2022.”
Very broadly, the international rating agency expects Malaysia’s economy to expand by 3.2% in 2023 which is a “large comedown” from the strong post-pandemic recovery of 8.7% in 2022. The global economic slowdown and higher interest rates are key drivers of a slower economy.
Moving forward, net interest margins of Malaysian banks are also likely to decline by five to 10 basis points (bps) as term deposit rates continue to increase in step with policy rates, according to S&P Global Ratings.
Sector-wide, return on assets could stay flattish at 1.4% in 2023 due to the expected decline in net interest margins which should be balanced by a normalisation in tax rates.
“Worsening conditions is a negative for asset quality,” observed Anand. “However, a moderate deterioration should be manageable as corporate and household balance sheets remain robust.”
Furthermore, she expects stable employment conditions and adequate household financial assets to be mitigating factors against high household debt.
However, low-income households and small and mid-sized enterprises (SMEs) are particularly vulnerable to rising costs although banks’ adequate provisioning buffers should help them absorb accelerating credit risks.
“We see limited contagion effects from recent troubles at US regional banks and Credit Suisse,” Anand pointed out.
“Significant household deposits add stability to Malaysian banks’ funding profile. Investment portfolios form about 20% of total assets with half of the exposure in safe government securities.”
Added Anand: “Healthy capitalisation and stable retail deposit bases are key credit strengths for Malaysian banks.” – April 11, 2023