KUALA LUMPUR: Fitch Ratings anticipates that the operating environment for local banks will remain favourable over the next 12 to 18 months, driven by a projected gross domestic product (GDP) growth of 4.4 per cent to 4.5 per cent in 2024 and 2025.
The international credit rating agency noted that this positive environment is expected to sustain demand for credit, bolster banks' revenue prospects, and help maintain the stability of their credit profiles.
"We expect banks' net interest margins to gradually recover over the next few quarters as funding conditions ease.
"Market-related incomes are also likely to stay high as banks benefit from sustained volatility. These should offset higher operating costs to keep profitability intact," the firm said in a statement.
According to Fitch Rating, the local banking system's operating environment score is currently at the same level as the sovereign rating of BBB+/Stable and is unlikely to be upgraded unless the sovereign is upgraded.
It added that the operating environment score constrains banks' viability ratings, which drive their issuer default ratings, as the banks largely operate within Malaysia.
The agency said that the local policy rate is likely to remain stable in the near term, supporting banks' loan yields while also limiting impairment risks on their loan portfolios that remain largely retail-focused.
"Household leverage is high in Malaysia at around 84 per cent of GDP at end-2023, but risks are likely to remain contained in the near term on the back of healthy job market conditions and a stable real estate market," it said.
On banks' net interest margins (NIMs), Fitch Ratings expects it to gradually recover in the second half of this year as funding competition eases amid stable deposit rates and interbank rates in recent months.
The agency said that a higher loan contribution from the small and medium enterprise (SME) segment should also aid margins over the medium term.
"Most banks have been able to offset the compression in lending margins through larger trading gains as they capitalise on volatility in the capital and foreign-exchange (FX) markets.
"Banks are poised to post high market-related income in 2024 on continued volatility in the FX market and as global interest rates start to decline," it added.