PETALING JAYA: Fitch Ratings expects Malaysian banks’ net interest margins (NIMs) to stabilise by year-end as interest rates peak and deposits reprice.
The international rating agency expects NIM contraction in Malaysia, which has occurred sooner than in regional peer markets, to narrow at a slower pace in the second half of 2023 (2H23).
This is primarily attributed to the peaking of interest rates, with banks effectively passing on the increased cost of deposits to borrowers.
Fitch believes average deposit rates are likely to increase in the near term and align with the Bank Negara’s overnight policy rate (OPR).
“However, pressure on banks’ NIMs is likely to level off by end-2023 with swift repricing on term deposits, which are overwhelmingly short term,” it said in a sectoral report.
It said Malaysia’s six-largest banks saw their NIMs fall below pre-pandemic levels in 1H23 even as the OPR has reverted to end-2019’s rate of 3%.
It believed this margin compression is primarily driven by Malaysia’s low current account, savings account ratio, which is less than half the level of other regional peer banking systems.
The rating agency said rates on term deposits have increased by 120 basis points since the end of 2021, which is roughly three times the rate of increase seen in savings deposits.
Fitch added that policy rate changes in Malaysia tend to be reflected in market rates quickly because of the short tenors of term deposits.
It forecast the policy rate to remain stable until end-2024 and therefore expects the repricing of deposits to be completed by late-2023.
“This will alleviate competition for deposits in the system, which has seen episodes of price wars in early 2023,” it said.
Fitch has projected modest improvements in profitability as NIMs stabilise and non-interest incomes recover.
Major Malaysian banks continue to be funded by a broad base of deposits and the rating agency expects liquidity conditions to remain accommodative in the near term.
“The system loan/deposit ratio has held steady between 86% and 89% over the past four years, and the liquidity coverage ratio also remains healthy at 155% at end-July 2023,” it noted.
However, Fitch pointed out on the potential risks associated with persistent inflation.
While headline inflation has decreased to a two-year low of 2% in July 2023, the agency expects it to continue moderating in 2024.
“Any aggressive return of inflationary pressures and a push for Bank Negara to hike interest rates further would risk causing liquidity to tighten and more intense deposit competition,” the rating agency warned.
Fitch said NIMs are nevertheless likely to be supported under such a scenario, due to the faster repricing of assets relative to deposits.
Overall, it has a “neutral” stance on the local banking sector and expects ratings for banks it assess to remain steady in the near future.
It expects the stabilising NIMs will facilitate improved profitability and system liquidity conditions continue to remain accommodative.