KUALA LUMPUR (June 6): Malaysian banks’ profit outperformance in 2024 will be constrained by lower provisioning charges, which may be offset by more moderate loan growth, despite steady profitability in the first quarter (1Q2024), according to RAM Ratings.
Tracking eight selected local banks, RAM Ratings said that the average pre-tax return for these banks stood at an annualised rate of 1.37%, compared with 1.38% in 1Q2023. The return on equity remained stable at 13.8%, slightly lower than the 13.9% recorded over the same period last year.
In a statement on Thursday, the rating agency said loan growth was also sustained at an annualised rate of 5.3% as of end-March 2024, consistent with the recovery in exports driven by the emerging semiconductor upcycle.
However, it said household credit demand showed moderation, except for passenger car hire purchase, which recorded softer growth.
“Considering the impending petrol subsidy retargeting, which may also have a dampening effect on credit demand in the second half of 2024, we project loan growth of 5% for the full year,” RAM Ratings added.
During the quarter, the rating agency noted, net interest margins (NIMs) faced 'significant compression', due to elevated funding costs resulting from multiple rate hikes and heightened deposit competition in 2023.
Although the average NIM of the eight banks contracted by 10 basis points (bps) year-on-year to 2.03% in 1Q2024, there was a modest uptick on a quarter-on-quarter basis (4Q2023: 2.02%), said Wong Yin Ching, RAM Ratings' co-head of financial institution ratings.
Wong expects full-year margins in 2024 to remain largely suppressed, similar to the previous year.
On asset quality, RAM Ratings anticipated a gross impaired loan ratio of 1.6% to 1.7% by year end, after first-quarter data showed a marginal decrease to 1.62% (end-December 2023: 1.65%).
“Favourable labour market conditions — with the unemployment rate recovering to the pre-pandemic level of 3.3% — should help contain the adverse impact of the roll-out of subsidy rationalisation,” RAM Ratings said.
It added that the eight banks’ average credit cost ratio also stayed relatively benign at 22 bps in 1Q2024 (1Q2023: 18 bps; 2023: 23 bps), given the sizeable management overlays that remain.
“Some write-backs of these overlays are anticipated, but banks are prudently assessing the quantum and timing of reversals, in view of the macro headwinds,” added Wong.