Flattish to lower net interest margins for banks


PETALING JAYA: Local banks’ net interest margins (NIMs), which is the difference between what they earn from loans and what they have to pay depositors, may remain flattish or trend lower in the coming quarters.

According to UOB Kay Hian Research (UOBKH Research) most banks anticipate a largely flattish quarter-on-quarter (q-o-q) NIM trend in the first quarter of 2024 (1Q24) and flattish to slight compression in 2024 versus 2023 despite the easing of competition for deposits.

“We expect Bank Negara to hold the current overnight policy rate (OPR) at 3% for the rest of 2024. Competition within certain lending segments, such as residential mortgages, is intensifying, leading to slight downside risk in 2024 sector NIM,” said the research firm in a regional-banking report.

Given these factors, UOBKH Research projects the sector’s NIM at around 2.05% in 2024 (similar to that of 2023) even as OPR has normalised to pre-Covid levels.

The sector margins were around 2.10% before the pandemic.

The research firm sees a modest recovery in loan growth for 2024, estimated at 5.5%-6.%.

“The February loan growth of 5.8% remains broadly within our full-year 2024 estimates.

“This represents a slight recovery from 2023’s 5.3% growth, driven largely by the anticipation of stronger business-loans growth, which is currently tracking 5.3%, while household loans are expected to remain fairly stable.”

The research house said current sector valuations were fair considering the absence of new catalysts.

However, sector dividend yields are attractive, surpassing 5%, and credit costs remain stable given the robust provision buffers in place.

The research firm said historically, banks with higher foreign shareholdings, such as CIMB Group Holdings Bhd, have outperformed the KL Finance Index during periods of a strengthening ringgit against the US dollar.

“Our in-house economics team anticipates a gradual strengthening of the US dollar/ringgit exchange rate to 4.55 by 2Q24. This is supported by an improvement in gross domestic product growth to 4.6% in 2024 (2023: 4%) and the peaking of the interest rate cycle in the United States.”

Within Asean, the research house said Indonesian banks offer the highest earnings growth in 2024-2025 and will benefit from the recent rally in commodity prices. It also likes Singapore banks for their attractive dividend yields, while a potential rate cut in Thailand in 4Q24 is positive for their small banks.

Meanwhile, RHB Research in its recent market strategy report said NIM guidance from Malaysian banks has been mixed.

“There has been some yield pressure in segments such as mortgages and small and medium enterprises (SMEs), while strong credit growth may lead to a pick-up in deposit competition.

“Also, operating expenditures may be sticky due to inflation and currency effects, as well as ongoing investments for building digital and technological capabilities.”

Based on the 1Q24 briefings by banks, the research firm said “several banks appear guarded, with respect to the macroeconomic outlook, citing factors such as inflationary pressures, normalisation of interest rates, and a weaker currency, among others.

“That said, we note optimism on loan demand supported by retail mortgages, SMEs, and roll-out of infrastructure projects.”

As for asset quality, RHB Research said it appears benign, with no major stress areas noted although banks remain watchful over certain cohorts. Also, some banks had taken the opportunity to further strengthen provision buffers last year and are still holding on to the overlays.

From the briefings, it said banks are in no rush to write back the overlays and, instead, intend to incorporate the bulk of such overlays into their models.

The research firm projects 2024 sector profit after tax and minority interests to moderate to 7% from 13% in 2023. This factored in NIMs stabilising after a 25 basis points (bps) year-on-year drop in 2023 and the assumption that credit costs will ease by another one bps to 23 bps in 2024.

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