PETALING JAYA: Banks’ balance sheets are expected to remain solid this year although profit outperformance will be challenging due to keen competition and ongoing cost pressures, according to RAM Rating Services Bhd.
Their credit fundamentals are being supported by low levels of impaired loans, robust loss absorption buffers and diversified funding channels, said RAM Ratings co-head of financial institution ratings Wong Yin Ching.
“Notwithstanding lingering uncertainties over global economic conditions and fresh cost of living pressures from the rationalisation of subsidies, we expect banks to sustain their credit profiles this year,” she said, ahead of the release of the rating agency’s annual banking insight.
RAM Ratings is maintaining its “stable” outlook on the Malaysian banking sector, she added.
In terms of the banking industry’s gross impaired loans (GIL), Wong said the industry’s GIL ratio is anticipated to remain broadly stable at between 1.6% and 1.7% by year end compared with 1.65% last year.
“Weaknesses in the commercial real estate, construction, wholesale and retail trade sectors, along with lower-income households may cause a modest rise in bad loans.
“A large portion of management overlays set aside during the Covid-19 pandemic remains on banks’ balance sheets.
“Potential write-offs of impaired exposures against these excess provisions will likely keep the GIL ratio in check,” she said.
The GIL coverage (including regulatory reserves) of eight selected local banks rated by RAM Ratings was a solid 134% as at end-2023 (end-2019: 107%).
Banks generally reported lower provisioning expenses in 2023, with the average credit cost ratio of the eight banks improving from 30 basis points (bps) to 23 bps.
The ratio is envisaged to come in slightly lower this year at around 20 bps, premised on RAM Ratings’ view that loan impairments would be largely contained.
As for loan growth, Wong expects it to ease to 5% this year from 5.3% last year, noting that weaker domestic consumption may dampen demand for consumer loans.
She said the proposed re-targeting of subsidies in the second half of this year (2H24) and its execution is the biggest wild card for household loan expansion this year.
The negative impact is, however, likely to be partly countered by business loans which would benefit from a rebound in exports and global trade, she said.
Wong said business loan approvals notably trended up in the fourth quarter of 2023 (4Q23) and she expects this momentum to be sustained in 2024.
“After a disappointing 8% year-on-year (y-o-y) contraction in 2023, recent exports data is showing promising signs of reversal, with January 2024 exports up 8.7% y-o-y after 10 prior consecutive monthly declines.
“The upturn bodes well for business loan growth and is also a key factor underpinning RAM Ratings’ gross domestic product growth forecast of 4.5% to 5.5% for Malaysia this year,” she added.
On the profitability front, Wong expects the overnight policy rate to be kept unchanged and deposit competition to persist at current levels this year, resulting in net interest margins (NIMs) to remain suppressed.
In general, Malaysian banks’ profitability, while still intact, would see limited upside in light of the difficult operating landscape and still-elevated operating cost, she noted.
NIM, a measure of profitability, is the spread bank earns between borrowing and lending. A wider NIM indicates higher earnings for banks.
Severe margin compression led to a decline of 29 bps y-o-y to 2.07% in 2023 and, to a lesser extent, increased operating expenses, saw the eight banks’ average pre-tax return on assets and return on equity dipped to 1.36% and 13.6%, respectively (2022: 1.41% and 14%).
On another note, Wong expects banks’ funding and liquidity profiles to stay sound and supportive of new lending.
Banks also exhibited resilience in accessing the domestic market for additional tier-1 (AT1) issuances despite initial investor concerns and divisive global debate following the Credit Suisse AT1 bond writedown in March 2023, she said.
The industry’s common equity tier-1 capital ratio remains sturdy at 14.6% as at end-2023 (end-2022: 15.2%).
In tandem with global capital reforms, she said Bank Negara’s proposed revision of capital charge requirements – likely to be effective on Jan 1, 2026 – are expected to have a broadly net neutral impact for banks on Standardised Approach.
She said the introduction of a new capital output floor for banks on the Internal Ratings-based (IRB) approach is a key feature under the revised Standardised Approach framework.
“The new concept aims to narrow the wide variance in current risk-weighted asset calculations, by limiting the capital benefits that IRB banks can achieve relative to Standardised Approach banks, thereby bridging the gap between the two approaches. The expected phased-in implementation over five years, however, should give IRB banks sufficient lead time to comply with the new regulations,” she noted.
Separately, the rating agency said the digital banking front was making good progress.
As at end-February 2024, three of the five licensed domestic digital bank operators – including one Islamic digital bank – had commenced operations. GX Bank Bhd held the distinction of being the first to roll out the beta version of its digital application in September 2023, followed by Boost Bank Bhd and AEON Bank (M) Bhd early this year.
“For now, the product offerings of all three digital banks or neo banks are limited to savings accounts, debit cards and reward schemes tied to partners within their respective ecosystems. It will be interesting to see if these challenger banks can gain traction beyond early adopters in these ecosystems and expand sustainably without incurring substantial acquisition costs, contain credit and technology risks and, most importantly, gain the loyalty of their captive audience,” it noted.
Digital banks are banks that offer financial services solely through electronic or digital means, with no branches.
Furthermore, RAM said the regulatory asset cap of RM3bil for each neobank during the foundational phase (first three to five years) means that the aggregated assets of these digital banks would remain below 1% of the banking system’s assets. “At this threshold, RAM believes the neobanks should not pose any threat to the incumbent banks, who are themselves investing heavily in digitalisation and improving user experience. Some players have made significant progress on this front, with continuous enhancements to their banking applications and establishing digital banks of their own,” the rating agency said.
