This article first appeared in The Edge Malaysia Weekly on September 23, 2024 - September 29, 2024

THE net interest margin (NIM) of Malaysian banks, on a decline since last year amid the intense competition for deposits in the industry, is seen recovering meaningfully only next year.

Interestingly, last year, for the first time ever, the average NIM of Malaysian banks was lower than that of their Singapore counterparts. NIM, a key measure of profitability, indicates how much a bank earns in interest on loans against what it pays out to depositors.

“Given the pause in overnight policy rate (OPR) hikes by Bank Negara Malaysia (while Singapore rates continued to rise in tandem with the US federal fund rate), and the intense competition that set in, average NIMs for Malaysian banks were lower than Singapore NIMs for the first time ever,” Maybank Investment Bank Research notes in a Sept 17 report on the sector (see chart).

The average NIM of Malaysian public-listed banks (excluding small lenders Affin Bank Bhd [KL:AFFIN] and MBSB Bank Bhd [KL:MBSB]) stood at 2.07% last year compared with Singapore banks’ 2.17%. In the previous year, the NIMs stood at 2.37% and 1.84% respectively.

For perspective, within Asean, Indonesian banks have the highest NIMs which, at 4% to 5%, also make them among the highest in the world.

So far this year, with a few exceptions, Malaysian banks’ NIMs have held steady amid an easing in the competition for deposits and concerted efforts to manage funding costs better. Most banks have guided for NIMs this year to come in at around the same level as last year, or slightly higher.

“On an aggregate basis, we expect NIMs to be stable year on year (y-o-y) this year, averaging about 2.07% for the banks in our coverage, and we have conservatively imputed a 2bps (basis point) recovery in 2025,” Maybank IB Research says.

Given improving liquidity conditions — as seen from the trends of growing current account savings account (CASA) deposits, an easing in the three-month Kuala Lumpur Interbank Offered Rate (KLIBOR) and improving liquidity coverage ratios at Islamic banks — as well as easing price competition, there is room for bank NIMs to “surprise positively into 2025”, it adds.

While the US Federal Reserve cut interest rates by a higher-than-expected 50bps early last Thursday, its first cut in four years and the start of further monetary policy loosening in the world’s largest economy, several economists are of the view that Bank Negara is unlikely to make any change this year in the OPR — a move that would bode well for banks’ NIMs. Any rate cut in the OPR would likely exacerbate NIM compression.

“Bucking the rate cut wagon may be observed by both Bank Negara and the Monetary Authority of Singapore, where we expect the OPR to stay at 3% for 2024, while MAS is to keep policy parameters unchanged for the whole year,” says RHB Research’s acting group chief economist and head of market research, Barnabas Gan. Bank Negara’s next monetary policy meeting — its final one for the year — is on Nov 5 and 6.

Nomura Research banking analyst Tushar Mohata expects “stable to improving” NIMs in the second half of this year. “We expect stable to improving NIMs in 2H2024 due to tapering loans growth, better CASA growth outlook and continued rational deposit pricing by most banks,” he tells The Edge.

Mohata believes the Fed’s interest rate cut may indirectly improve NIM prospects for some Malaysian banks. “Some Malaysian banks have suggested that Fed rate cuts improve NIM prospects for them too. We think [an] improving liquidity situation in ringgit deposits, thanks to the recent strength in the ringgit, should also help NIM for Malaysian banks,” he says. Nomura has an “overweight” call on the sector.

Kenanga Research’s banking analyst Clement Chua, who also has an “overweight” call on the sector, notes that NIM recovery will vary between the banks.

“Although deposit competition is seen to normalise, NIM recoveries may still be scattered between banks as each deploy different loan strategies, with the likes of CIMB Group Holdings Bhd (KL:CIMB) and AMMB Holdings Bhd (KL:AMBANK) guarding profits at the expense of market share, while other lenders like Malayan Banking Bhd (KL:MAYBANK) still guide for a margin decline due to wider customer onboarding,” he tells The Edge.

In the April-to-June quarter (2Q2024), the NIM of all banks — except for Public Bank Bhd (KL:PBBANK) and Affin Bank — improved on a quarter-on-quarter (q-o-q) basis. Public Bank’s NIM fell by 2bps to 2.19%, while Affin Bank’s declined 4bps to 1.4%.

Notably, AMMB saw strong improvement in NIM, by 10bps q-o-q and 13bps y-o-y, to 1.89% as it looked to term funding to help ease some of the cost pressures. It repriced downwards its fixed-deposit board rates in July and thus should have room for NIM to see further improvement ahead, analysts say.

NIMs in 2Q2024 fell y-o-y only for Maybank (-12bps to 2.02%) and CIMB (-2bps to 2.22%). For the first half of the year (1H2024), NIMs declined y-o-y for Affin Bank (-21bps to 1.42%), Maybank (-14bps to 2.01%), CIMB (-3bps to 2.25%), RHB Bank (KL:RHBBANK)(-3bps to 1.79%) and Public Bank (-1bps to 2.19%).

“In 1H2024, Affin and Maybank’s NIMs compressed the sharpest due to funding cost pressures to fund loans growth, as well as NIM dilution from Singapore [for Maybank],” notes RHB Research. 

Meanwhile, except for Public Bank, Malaysian banks have yet to see their NIMs return to the pre-pandemic levels of 2019. The variance ranges from 1bps for Alliance Bank Malaysia Bhd (KL:ABMB) to 21bps for RHB Bank, notes Maybank IB Research.

“If NIMs do return to pre-pandemic (2019) levels then, hypothetically, we could see FY2025-FY2026 earnings upgrades ranging from 1% to 16%, with Bank Islam Malaysia Bhd (KL:BIMB) (+14%) and RHB Bank (+16%) potentially [seeing] the largest earnings revisions, given the broad disparity between where their NIMs are now, relative to [2019].

“Least impacted would be Public Bank (whose NIMs have already been restored to pre-pandemic levels) and Alliance Bank (+1% earnings change),” the research house says.

It maintained a “positive” investment call on the banking sector, with “buy” recommendations on AMMB, CIMB, Public Bank, RHB Bank, Hong Leong Bank Bhd (KL:HLBANK) and Hong Leong Financial Group Bhd (KL:HLFG).

Meanwhile, Hong Leong Bank Investment Research maintains a “neutral” investment call on the sector. “So far, we have been conservative and are projecting a mild NIM slippage of 0bps to 1bps for FY2024-FY2025. From our sensitivity analysis, we estimate that for every 1bps expansion in sector NIM, banks’ earnings forecast could be raised by 0.9%,” it says in a Sept 12 report, noting that Affin Bank and Bank Islam have the largest bottom-line sensitivity to NIM movement.

“Overall, we see upside bias to the NIM estimate for next year. In our view, mid and small banks are poised to benefit more since they are inherently more susceptible to fixed deposit competition and, currently, the situation may shift to their favour. This aligns well with our new investment strategy to focus on mid and small banks, which we believe are able to offer more favourable risk-reward opportunities compared with large banks that appeared to be fairly priced,” it says. It has “buy” calls for RHB Bank, AMMB, Bank Islam and Alliance Bank. 

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