Deposit war squeezes Malaysian banks’ margins

There is a steady outflow of savings deposits into higher-yielding fixed deposits, says S&P.

Malaysian banks are witnessing an intensifying deposit competition that will push their net interest margins to fall in 2023.

Lenders could expect to see a 10 to 20 basis points (bp) compression in margins during the year amidst price competition for fixed deposit rates, reports S&P Global Ratings.

“During the first quarter of 2023, net interest margins for rated banks fell sharply. This reflects the steady outflow from savings deposits into higher-yielding fixed deposits,” the ratings agency said.

For large Malaysian banks, the outflows have been more acute in their Singapore operations, and partially indicates a lower share of sticky retail deposits in Singapore, according to S&P.

Deposit rates will stabilise over the next three quarters. Banks' efforts to tap low-cost deposits from corporates and small businesses could help offset the pressure on margins.

"Asset quality risks appear to be easing for Malaysian banks, as underlined by first-quarter 2023 results. The new drags are coming from higher interest rates—which are reducing borrowing appetite and are feeding into bank funding costs," said S&P Global Ratings credit analyst Nikita Anand.

"Overall, the country's rated banks can maintain good profitability despite declining margins. This and a reasonable pace of credit growth support healthy capitalization," Ms. Anand said.

Profits flat but stable
Malaysian banks rated by S&P are likely to record “good” yet flat profits, with return on assets staying at about 1.4%

"Asset quality risks appear to be easing for Malaysian banks, as underlined by first-quarter 2023 results. The new drags are coming from higher interest rates—which are reducing borrowing appetite and are feeding into bank funding costs," said S&P Global Ratings credit analyst Nikita Anand.

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"Overall, the country's rated banks can maintain good profitability despite declining margins. This and a reasonable pace of credit growth support healthy capitalization," Anand said.

“Good profitability, reasonable credit growth, and dividend payout should support healthy capitalization,” she added.

Credit growth, however, will slow amidst a higher interest rate environment and property woes across Southeast Asia. Notably, loan growth in banks’ overseas operations will see a more pronounced slowdown.

“Both Malayan Banking and CIMB Group Holdings reported minor contractions in their Singapore loan portfolios in the first quarter. This in our view is due to higher funding costs muting credit growth. Asset quality overhangs in certain pockets such as construction and property loans in Southeast Asia could result in more cautious lending in those markets,” Anand said.