Fitch Ratings expects net interest margin (NIM) contraction among local banks, which has occurred sooner than in regional peer markets, to narrow at a slower pace in 2H23 as interest rates peak and banks remain effective in passing on a higher cost of deposits to borrowers.
Average deposit rates are likely to rise further in the near term and catch up to Bank Negara Malaysia’s (BNM) overnight policy rate. However, pressure on banks’ NIMs is likely to level off by end-2023 with swift repricing on term deposits, which are overwhelmingly short term.
On Low CASA, Fitch says Malaysia’s six-largest banks’ NIMs fell below pre-pandemic levels in 1H23 even as the local policy
rate has reverted to end-2019’s 3.0%. It believes this margin compression is driven primarily by Malaysia’s low current and savings accounts (CASA) ratio, which is less than half the level of other peer banking systems. Rates on term deposits have risen by about 120bp since end-2021, about three times that of the increase on savings deposits.
Policy rate changes in Malaysia tend to be reflected in market rates quickly because of the short tenors of term deposits. We forecast the policy rate to remain stable until end-2024, and therefore expect the repricing of deposits to be complete by late-2023. This will alleviate competition for deposits in the system, which has seen episodes of price wars in early-2023.
The rating house, projected modest improvements in profitability as NIMs stabilise and non-interest incomes recover. The major Malaysian banks also continue to be funded by a broad base of deposits, and expect liquidity conditions to remain accommodative in the near term. The system loan/deposit ratio has held steady between 86%-89% over the past four years, and the liquidity coverage ratio also remains healthy at 155% at end-July 2023.
As to what to look out for, Fitch notes risks of persistent inflation is one, headline inflation declined to a two-year low of 2.0% in July 2023, and forecasts it to continue to moderate in 2024. However, any aggressive return of inflationary pressures, and a push for BNM to hike interest rates further, would risk causing liquidity to tighten and more intense deposit competition. NIMs are nevertheless likely to be supported under such a scenario, due to the faster repricing of assets relative to deposits.
Fitch remains Neutral on the sector, as it believes stabilising NIMs will facilitate improved profitability. System liquidity conditions remain accommodative.
