KUALA LUMPUR (Aug 13): The operating environment for Malaysian banks is expected to remain favourable over the next 12-18 months on sustained credit demand, recovery in net interest margins and constructive market trading environment, according to Fitch Ratings.

In a bank sector report published on Monday, it said the key interest rate is likely to remain stable in the near term which could lend support to banks' loan yields and also help limit impairment risks on their loan portfolios that remain largely retail focused.

“Household leverage is high in Malaysia at around 84% of GDP at end-2023, but risks are likely to remain contained in the near term on the back of healthy job market conditions and a stable real estate market,” it noted.

The credit rating agency also thinks that net interest margins (NIM) will gradually recover in 2H24 as funding competition eases and higher loan contribution from the SME segment should also aid margins over the medium term.

It believes banks are poised to post high market-related income in 2024 on continued volatility in the foreign exchange market and as global interest rates start to decline.

“Market-related incomes are also likely to stay high as banks benefit from sustained volatility. These should offset higher operating costs to keep profitability intact,” noted the credit rating agency which projects Malaysia's GDP to grow by 4.4%-4.5% in 2024 and 2025.

Fitch rates Malaysia's banking system operating environment (OE) score BBB+/ Stable, which is the same level as the sovereign rating.

The rating agency noted the bank sector rating is unlikely to be upgraded unless the sovereign is upgraded.