KUALA LUMPUR (July 26): Southeast Asia's largest banks will see their margins plateau soon as funding costs catch up with increasing interest rates, according to a report S&P Global Market Intelligence.

While eight of the region's 11 largest banks will likely see their net interest margins (NIM) continue to grow this year, the expansion may stop afterwards — according to analyst consensus estimates compiled by the agency, S&P Global Market Intelligence noted in a report on Tuesday (July 25).

Three banks are already expected to see NIM declines this year, with half of the rest likely to report minor drops in 2024, the consensus shows.

For example, Singapore's DBS Group Holdings Ltd, is expected to see NIM rise to 2.06% in 2023 from 1.75% in 2022 before declining to 1.97% in 2024, the report noted. Likewise, Indonesia's PT Bank Rakyat Indonesia (Persero) Tbk is expected to see NIM grow to 8.01% in 2023 from 6.80% in 2022, before slipping to 7.98% in 2024.

"In our base case, there are limited drivers for further NIM upside in the absence of further hikes," S&P Global Ratings analyst Ivan Tan was quoted as saying.

"We believe the rate hike cycle is near its end. Due to a lag in repricing, most of the NIM increase only flows into the books in 2023. Finally, deposit rates and cost of funding are catching up and eroding some margins from higher lending rates," Tan added.

Most central banks worldwide have signalled that further rate increases may not be necessary, the report noted, following the series of hikes led by the US Federal Reserve to counter inflation.

Maybank and CIMB likely to see NII declines

Nine of the 11 banks are expected to report higher net interest income (NII) this year, with lending growth and higher margins, said S&P Global Market Intelligence. The two exceptions are both Malaysian banks, namely Malayan Banking Bhd and CIMB Group Holdings Bhd, which may see declines.

In 2024, all 11 banks are expected to report higher NII in 2024.

Indonesia's Bank Rakyat, for example, will see NII rise to US$9.03 billion (RM41.05 billion) in 2023 from US$8.4 billion. Bank Mandiri's NII is projected to hit US$6.62 billion in 2023 and US$7.22 billion in 2024, up from US$5.92 billion in 2022.

"Reviving bank loan growth follows Indonesia's projected 4.8% GDP growth in 2023 and 5% in 2024, one of the highest in the region. (S&P Global) Ratings said in its July 20 global banking outlook report that it expects loans to hit the upper end of banks' 10% to 12% guidance for 2023," the report noted.

Several banks are expected to increase loan loss provisions in 2023 and 2024, including DBS, United Overseas Bank Ltd and Oversea-Chinese Banking Corp Ltd.

Maybank and CIMB Group Holdings Bhd, however, may see declines in 2023. And asset quality issues should remain manageable for Malaysian banks, with restructured loans totaling about 2%, the report noted.

Lenders in Southeast Asia are set to report second-quarter earnings amid expectations of a global economic slowdown.

On Tuesday, the International Monetary Fund raised its 2023 global growth forecast slightly to 3% from 2.8% in April given the resilient economic activity in the first quarter, but left its outlook for 2024 unchanged at 3%.