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Malaysian banking sector to see modest growth, profitability in 2024, says Fitch Ratings

Publish date: Wed, 29 Nov 2023, 03:34 PM

KUALA LUMPUR (Nov 29): Malaysia's banking sector will revert to a pre-pandemic state of modest growth and profitability in 2024, said Fitch Ratings. 

It expects net interest margins (NIMs) to hold steady, in line with Bank Negara Malaysia's (BNM) policy rate, noting that Malaysian banks were among the first in Southeast Asia to experience NIM compression in early 2023.

The credit rating agency said Malaysia's policy interest rate is not excessively contractionary, and had not historically been volatile, unlike many markets that faced high inflation over the past year.

"Any early pivot to a more dovish monetary policy has the potential to resume pressure on banks' NIMs. 

"The current likelihood is limited, as BNM remains vigilant against inflation risks and exchange-rate instability, but it also means a surprise shift could be disruptive, if realised," it said.

Fitch expects banks to continue to draw down on existing reserves to limit the increase in credit costs, thereby contributing to steady profitability.

It also noted that Malaysian banks had one of the highest proportions of credit exposure to the real estate sector in Asia-Pacific, with the mortgages, property and construction sectors accounting for just over half of total loans. 

The moderate interest rates and a healthy economy have kept the real estate market buoyant in recent quarters, it said. However, any macroeconomic headwinds that weigh on the sector would increase the negative impact on loan growth and asset quality because of the heavy lean on real estate lending. 

Fitch said growth opportunities are constrained by high household leverage. The household loan segment accounts for 60% of total lending in the system.

The credit rating agency expects loan growth, at about 5%, to lag nominal gross domestic product growth for the fourth consecutive year. 

Impaired-loan ratios are likely to rise marginally, as borrowers navigate higher financing costs, and with the continued roll-off of debt relief, it said. 

Deposit rates have risen significantly in 2023, but Fitch expects funding tightness to abate by year end, as pricing adjusts fully and loan growth moderates. 

"Liquidity conditions have eased, and we do not expect banks to face difficulties in accessing deposit and wholesale funding," it said.

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