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Bank Margins Battered In 2023, Says RAM Ratings

KUALA LUMPUR: Domestic banks experienced steep margin compression and increased operating expenses in 2023, which were partly balanced by stronger non-interest income and lighter provisioning charges.

RAM Rating Services Bhd said the average pre-tax return on assets and return on equity (ROE) of eight selected local banks was lower at 1.36 per cent and 13.6 per cent, respectively, compared to 1.41 per cent and 14.0 per cent recorded in 2022.

The rating agency said at the after-tax level. However, the one-off Cukai Makmur’s absence lifted profitability metrics higher than the previous year.

Further, the average net interest margin (NIM) of the eight banks narrowed by 28 bps to 2.07 per cent—the lowest level seen in the last five years.

While multiple overnight policy rate (OPR) hikes initially resulted in considerable margin expansion in 2022, RAM Ratings noted that banks have grappled with higher funding costs in the past year as deposits gradually repriced upwards.

The firm further said 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,” RAM Ratings’ co-head of financial institution ratings Wong Yin Ching said in a statement.

Domestic loans grew by a fairly strong 5.3 per cent in 2023. While lending momentum was tepid for much of the year, it accelerated in the fourth quarter (Q3), led by businesses.

RAM Ratings noted that 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,” the agency said.

On the asset quality front, given 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 the upside will be limited in light of prevailing uncertainties in the operating landscape,” Wong said.

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