Malaysian banks can ride out tougher conditions this year amid a slowdown in the country’s growth rate and weaker borrowing appetite, according to S&P Global Ratings.
In a statement on Tuesday (April 11) in conjunction with the release of its chartbook style report titled “Malaysian Banks Outlook 2023: Prepared For Tougher Conditions”, S&P Global Ratings credit analyst Nikita Anand said higher funding costs will drag on credit demand in Malaysia.
“Credit growth could slow to 4%-5%, from 6% in 2022,” she said.
S&P forecast Malaysia’s economy to expand by 3.2% in 2023.
The rating agency said this is a large comedown from the strong post-pandemic recovery of 8.7% in 2022.
The global economic slowdown and higher interest rates are key drivers of a slower economy, it said.
S&P said banks’ net interest margins are likely to decline by 5-10 basis points, as term deposit rates continue to increase in step with policy rates.
It said sector-wide return on assets could stay flattish at 1.4% in 2023. This is because the expected decline in net interest margins should be balanced by a normalisation in tax rates.
Anand said worsening conditions is a negative for asset quality.
“However, a moderate deterioration should be manageable, as corporate and household balance sheets remain robust.”
Furthermore, stable employment conditions and adequate household financial assets are mitigating factors against high household debt.
Low-income households and small- and mid-sized enterprises (SMEs) are particularly vulnerable to rising costs. Banks’ adequate provisioning buffers should help them absorb accelerating credit risks.
“We see limited contagion effects from recent troubles at US regional banks and Credit Suisse.
“Significant household deposits add stability to Malaysian banks’ funding profile. Investment portfolios form about 20% of total assets, with half of the exposure in safe government securities.
“Healthy capitalisation and stable retail deposit bases are key credit strengths for Malaysian banks,” said Anand.
Sources: theedgemarket