It said higher loan instalments and elevated cost pressures may result in “an uptick in delinquencies over the coming quarters”.
“These are expected to stem from pockets of borrowers especially those who are highly leveraged or small and medium-size enterprises in vulnerable business sectors,” the ratings agency said in its Banking Quarterly Roundup for Q3 2023 released today.
“However, we foresee the deterioration to be manageable, anticipating an industry gross impaired loan (GIL) ratio of below 2% in 2023.
“The debt servicing ability of individual borrowers continues to be supported by strong labour market conditions; the unemployment rate, at 3.4%, is close to pre-pandemic levels.”
RAM said the banking industry’s asset quality remains “robust and resilient”, with a 1.72% GIL ratio in the system as of end-September, unchanged from end-December 2022.
It said the most recent quarterly results announcements show banks’ profitability to be still sound overall, with the average pre-tax return on assets of eight selected local banks at 1.37% against 1.39% in Q2 2023 and 1.42% in 2022.
In Q3 2023, the average credit cost ratio of the eight banks improved to an annualised 19 basis points (bps) quarter-on-quarter (Q2 2023: 25 bps; 2022: 29 bps).
“Although we continue to see some management overlay releases at a few banks, a major portion of these provisions built up during the pandemic was either maintained or reassigned to various loan portfolios.
“Banks are prudently assessing the macroeconomic landscape before determining the amount of writebacks, if any,” said RAM’s co-head of financial institution ratings, Wong Yin Ching.
Margins reprieve
Following three consecutive quarters of contraction, margins saw some reprieve in Q3 2023, with the average net interest margin (NIM) of the eight banks stable quarter-on-quarter at 2.08%.
RAM said easing competition for deposits and the 25bps overnight policy rate (OPR) hike in May had lifted some pressure off NIMs during the quarter. However, it could be short-lived as deposit competition will likely pick up again as banks move into the fourth quarter.
It noted that newly operational digital banks may also intensify competition. GX Bank Bhd is the first digital bank to come on stream.
The rating agency said the banking system’s loan growth eased to an annualised 4.1% in the first nine months of 2023 following the strong 5.7% expansion last year.
For the full year, RAM expects profit outperformance to be relatively limited as lower provisions would be counterbalanced by narrower NIMs and moderating domestic loan growth.
At the after-tax level, however, banks should see some upside from the absence of the one-off prosperity or windfall tax, it added.