KUALA LUMPUR, June 13 — The financial results of Malaysian banks in the first quarter of 2023 showed “notable net interest margin (NIM) compression,” according to RAM Ratings.

This was “due to the rising cost of funds from the full impact of upward deposit repricing, keener deposit competition and the continued normalisation of current and savings account (CASA) balances,” it said in a statement.

The credit rating agency said despite another 25-basis point overnight policy rate (OPR) increase in May — a boon to margins — “a full-year margin squeeze is unlikely to be avoided.”

RAM Ratings co-head of financial institution ratings Wong Yin Ching noted that the average NIM of eight selected banks was a lower 2.13 per cent in the first quarter of 2023 compared to 2.41 per cent in the fourth quarter of 2022 and 2.28 per cent in the first quarter of last year.

“The cumulative 100-basis points OPR hike last year boosted banks’ NIMs in the second half of 2022 as lending rates repriced faster than deposits. However, the situation has reversed as the repricing of deposits has caught up,” she said.

Wong said “with rising rates, depositors have also been gradually reverting from low-cost CASA deposits to fixed deposits while the strong competition for deposits late last year, with attractive promotional rates, further contributed to costlier funding.”

Positively, the extent of deposit competition has dissipated somewhat, the rating agency noted.

RAM Ratings is maintaining its loan growth projection at 5.0 per cent for 2023 and noted that liquidity is ample in the system to support credit growth, with deposits expanding by 4.2 per cent.

On the asset quality front, Wong said the system’s gross impaired loan ratio inched up but remained well under control at 1.78 per cent as of end-April 2023 against 1.72 per cent at end-December 2022.

“While delinquencies are likely to creep up further in the prevailing challenging operating environment, we do not anticipate the ratio to exceed 2.0 per cent this year.

“The eight banks’ average credit cost ratio also stayed benign at just 16 basis points in the first quarter of 2023 against 19 basis points in the first quarter of 2022, given the sizeable management overlays set aside earlier,” Wong said.

She noted that some writebacks of management overlays were anticipated but banks were prudently assessing the quantum of reversals in view of the macro headwinds. — Bernama