RAM Ratings saw mixed profit performances in the latest financial results of eight selected local banking groups. While the majority faced additional net interest margin (NIM) pressure and heftier loan loss provisions, a few managed to counterbalance these challenges with robust income generated from treasury and markets-related activities.
The average NIM in 2Q 2023 declined 5 bps q-o-q to 2.08%, although less severe compared to the steep 29 bps contraction witnessed in 1Q 2023. “Multiple overnight policy rate (OPR) hikes allowed banks to enjoy robust NIM growth in 2022,” said Wong Yin Ching, RAM’s Co-Head of Financial Institution Ratings, adding that this trend had reversed in 1H 2023 after margin expansion peaked. “The rising cost of funds from the full impact of deposit repricing, keener deposit competition, and the ongoing normalisation of current and savings account balances had significantly crimped NIMs,” she said. On a positive note, margins have begun to stabilise given easing competition for deposits and the 25 bps OPR increase in May.
The average credit cost ratio of the eight banks in 2Q 2023 crept up to an annualised 25 bps q-o-q (1Q 2023: 16 bps; 2022: 29 bps). This however is in line with our full-year guidance of 25 bps, which remains slightly below pre-pandemic and 2022 levels. A substantial portion of management overlays built up during the pandemic had not been written back but were either maintained or reassigned to various loan portfolios in view of prevailing macroeconomic headwinds. The banking system’s gross impaired loan ratio inched up to 1.76% as at end-June 2023 (end-December 2022: 1.72%) and is unlikely to exceed 2% at the end of the year. This is still viewed as healthy.
The sector’s loan growth slowed to a tepid 2.8% in 1H 2023, on an annualised basis, after registering a strong expansion of 5.7% in 2022. The weaker demand for credit was attributable to higher interest rates, cost pressures and challenging global growth. We have revised our loan growth projection downwards to 4% for 2023 from our earlier 5% guidance.
Against the backdrop of narrower NIMs and moderating domestic loan growth, profit outperformance this year will be relatively limited. At the after-tax level, however, banks should see some upside from the absence of the one-off Cukai Makmur.
