Malaysian banks “well-placed” to weather 2023 headwinds: S&P

Credit costs are expected to stay flattish and slowing credit growth should be manageable.

Malaysian banks are well-placed to weather challenges in 2023, according to S&P Global Ratings, thanks the the country’s strong economic recovery that is expected to support borrowers and boost the banking sector’s financial performance.

Higher credit growth, better margins, and lower credit costs have improved banks’ pretax earnings, the ratings agency said in a report.

Credit costs are expected to stay flattish at 30-40 basis points (bps) in 2023. Whilst this is higher than the pre-pandemic average of 15bps, banks should be able to contain asset quality risks.

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“Although we believe asset quality risks will remain contained, the banks are likely to still be cautious amid higher interest rates and a global economic downturn,” said Nikita Anand, S&P Global Ratings credit analyst.

Amongst financial institutions, Malayan Banking Bhd (Maybank) and CIMB Bank are expected to retain higher credit costs than their peers at 40-50 bps. This is because of their sizeable exposure to markets with greater economic risk, such as Indonesia and Thailand, noted Anand.

Liquidity tightening manageable
Credit growth may slow to 5% in 2023, as bank lending rates reflect the full effect of the 100 bps increase in policy rates in 2022. Rates may further increase as S&P expects another 50 bps increase in 2023.

“We believe the ensuing liquidity tightening in Malaysia will be broadly manageable, given liquidity is coming off the high levels seen during the pandemic,” Anand said.

However, the growth of overseas operations for large Malaysian banks may slow more acutely. "Those in Singapore, for example, have had a sharp decline in low-cost savings deposits, raising their cost of funds," she noted.