KUALA LUMPUR: Higher interest rates and a firm economic recovery are likely to enhance Malaysian banks' revenue and profitability prospects, according to Fitch Ratings.
Credit impairments, however, were likely to rise but remain manageable, the firm added.
"These factors drove our recent revision of the operating environment score for the Malaysian banking sector to its pre-pandemic level of 'bbb+', from 'bbb', with a stable outlook," Fitch said in a report today.
The firm said higher rates would raise the cost of funds for banks. But the time lag in the repricing of liabilities relative to assets should improve lending margins in the near term.
Fitch projects a further 50 basis points (bp) policy rate hike in Malaysia by end-2023 under its base case, following Bank Negara Malaysia's 75bp hike year-to-date.
Malaysian banks' earnings are also poised to benefit from faster loan growth and continued easing in credit costs.
"We expect system loan growth to recover to around 6.0 per cent in 2022 (August 2022: 5.7 per cent, end-2021: 4.6 per cent) before moderating to sub-5.0 per cent in 2023."
It added that moderate interest-rate hikes and a solid economic recovery were likely to keep credit impairments and incremental credit costs manageable, as banks had built up their loan-loss reserves since the onset of the pandemic.
"We view these buffers as being adequate against expected credit losses. Nevertheless, a much sharper slowdown in global growth that weighs on Malaysia's export-oriented economy may dampen banks' operating incomes and worsen asset-quality metrics.
"This could pressure the banks' Viability Ratings if it remains protracted," Fitch said.