Banking industry’s asset quality remains robust – RAM Ratings

KUALA LUMPUR: The Malaysian banking industry’s asset quality remains robust and resilient, with a 1.72 per cent gross impaired loan (GIL) ratio in the system at end-September 2023, unchanged from end-December 2022, said RAM Ratings today.

In its Banking Quarterly Roundup for the third quarter of 2023 (3Q 2023), it said lighter provisioning expenses offset slightly weaker treasury during the quarter and markets-related income while net interest margin (NIM) held steady compared to the preceding quarter.

RAM said 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 per cent against 1.39 per cent in the 2Q 2023 and 1.42 per cent in 2022.

“In 3Q 2023, the average credit cost ratio of the eight banks improved to an annualised 19 basis points (bps) quarter-on-quarter (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,” said RAM’s co-head of Financial Institution Ratings Wong Yin Ching.

The ratings agency said higher loan installments and elevated cost pressures may result in an uptick in delinquencies over the coming quarters, stemming from pockets of borrowers, especially from those who are highly leveraged or small and medium-sized enterprises in vulnerable business sectors.

“However, we foresee the deterioration to be manageable, anticipating an industry GIL ratio of below 2.0 per cent in 2023. The debt servicing ability of individual borrowers continues to be supported by strong labour market conditions; the unemployment rate, at 3.4 per cent, is close to pre-pandemic levels,” it added.

Following three consecutive quarters of contraction, margins saw some reprieve in 3Q

2023, with the average NIM of the eight banks stable quarter-on-quarter at 2.08 per cent.

RAM said easing competition for deposits and the 25bps overnight policy rate hike in May had lifted some pressure off NIMs during the quarter but could be shortlived as deposit competition will likely pick up again as banks move into the fourth quarter.

It noted that newly operational digital banks may also intensify competition. GX Bank Bhd is the first digital bank to come on stream.

The ratings agency said the banking system’s loan growth eased to an annualised 4.1 per cent in the first nine months of 2023 following the strong 5.7 per cent expansion last year.

For the full year, RAM expects 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 prosperity or windfall tax, it added. – BK