Banks’ Profitability Remained Steady In 1Q 2024 With Limited Upside Room Ahead: RAM Ratings

Malaysian banks’ 1Q 2024 financial results showed steady profitability, in line with RAM Ratings’ expectations.

The average pre-tax return on assets and return on equity of eight selected local banks clocked in at an annualised 1.37% and 13.8%, respectively (1Q 2023: 1.38% and 13.9%). Profit outperformance in 2024 will be relatively limited. Potentially lower provisioning charges may be offset by more moderate loan growth, while margins are likely to stay flat, the ratings agency said today.

The banking system’s loan growth was sustained at an annualised 5.3% as at end-March 2024 (2023: 5.3%). Business loan expansion staged a rebound in late 2023, which persisted into 1Q 2024. This was consistent with the recovery in exports led by the emerging semiconductor upcycle.

Household credit demand, on the other hand, saw some moderation. All key household subsegments, except passenger car hire purchase, recorded softer growth.

Considering the impending petrol subsidy retargeting which may also have a dampening effect on credit demand in 2H 2024, we project loan growth of 5.0% for the full year.

Net interest margins (NIMs) were significantly compressed in 2023 due to the elevated cost of funds from the upward repricing of deposits following multiple rate hikes and heightened deposit competition.

RAM’s Co-head of Financial Institution Ratings Wong Yin Ching said: “On a positive note, margin trends have stabilised as competition for deposits eased. Although the average NIM of the eight banks contracted by 10 bps y-o-y to 2.03% in 1Q 2024, the metric registered a modest uptick on a q-o-q basis (4Q 2023: 2.02%).”

“Overall, we expect full-year margins in 2024 to remain largely suppressed, similar to the year before,” she said.

On the asset quality front, the system’s gross impaired loan (GIL) ratio inched down marginally 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 from the rollout of subsidy rationalisation.

The GIL ratio is envisaged to come in between 1.6% and 1.7% by year end. The eight banks’ average credit cost ratio also stayed relatively benign at 22 bps in 1Q 2024 (1Q 2023: 18 bps; 2023: 23 bps), given the sizeable management overlays that remain.

“Some writebacks of these overlays are anticipated but banks are prudently assessing the quantum and timing of reversals in view of the macro headwinds,” Wong added.

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