Banks struggle to maintain profitability amid stagnant margins, moderate loan growth

by RUPINDER SINGH 

THE first-quarter financial results for 2024 have cast a shadow over the Malaysian banking sector, revealing a landscape of stagnation and limited growth. 

While profitability remains stable, as predicted by RAM Rating Services Bhd (RAM Ratings), the sector’s outlook is far from rosy. 

The average pretax return on assets and return on equity for eight major local banks stood at 1.37% and 13.8% respectively — marginally down from 1.38% and 13.9% in the first quarter of 2023 (1Q23). 

RAM Ratings foresee little room for profit outperformance in 2024, with lower provisioning charges likely being offset by tepid loan growth and stagnant margins. 

It noted that the banking system’s loan growth maintained a lacklustre annualised rate of 5.3% as of March 2024, unchanged from 2023. 

While business loan expansion showed some resilience, buoyed by a recovery in exports driven by the semiconductor sector, it said household credit demand displayed notable signs of weakening. 

All household credit segments, except for passenger car hire purchases, experienced slower growth, it said. 

It added that the impending retargeting of petrol subsidies is expected to further dampen credit demand in the second half of 2024 (2H24), leading to a projected loan growth of just 5% for the entire year. 

RAM Ratings noted that the banks’ net interest margins (NIMs) 

continued to suffer significant compression in 2023 due to the rising cost of funds from upward repricing of deposits and intensified deposit competition. 

Despite a minor quarter-on-quarter uptick to 2.03% in 1Q24 from 2.02% in 4Q23, it said the average NIM contracted by 10 basis points (bps) year-on-year. 

This modest improvement offers little solace as full-year margins are expected to remain suppressed, mirroring the previous year’s trend. 

On the asset quality front, it stated that the system’s gross impaired loan (GIL) ratio only saw a slight decline to 1.62% from 1.65% at the end of December 2023. 

Although the labour market has shown improvement, with the unemployment rate returning to the pre-pandemic level of 3.3%, RAM Ratings said the rollout of subsidy rationalisation could pose new risks. 

The GIL ratio is anticipated to hover between 1.6% and 1.7% by year-end, it added. 

Credit costs also present a mixed picture, according to RAM Ratings. The eight banks’ average credit cost ratio remained stable at 22bps in 1Q24, slightly up from 18bps in 1Q23.

While some writebacks of management overlays are expected, banks are cautiously evaluating the timing and extent of these reversals amid prevailing macroeconomic uncertainties. 

RAM Ratings’ co-head of Financial Institution Ratings Wong Yin Ching remarked on the cautious optimism: “Overall, we expect full-year margins in 2024 to remain largely suppressed, similar to the year before.” 

This statement encapsulates the prevailing sentiment within the industry — a cautious optimism tempered by an acknowledgement of ongoing challenges. 


  • This article first appeared in The Malaysian Reserve weekly print edition