Rising funding costs to dampen margin growth for Southeast Asia banks

Margins at Southeast Asia's largest banks are likely to plateau as their cost of funds catches up with the increase in interest rates.

Eight of the region's 11 largest banks by assets will likely see their net interest margins (NIMs) continue to grow in 2023, but margins may stop expanding thereafter, according to analyst consensus estimates compiled by S&P Global Market Intelligence.

Meanwhile, three banks are expected to post declines in NIMs in 2023, and half are likely to report minor drops in 2024, the estimates show.

"In our base case, there are limited drivers for further NIM upside in the absence of further hikes," Ivan Tan, an analyst at S&P Global Ratings, told Market Intelligence. "We believe the rate hike cycle is near its end. Due to a lag in repricing, most of the NIM increase only flows into the books in 2023. Finally, deposit rates and cost of funding are catching up and eroding some margins from higher lending rates."

Inflation fight

Most financial regulators in the rapidly expanding economic region, including Singapore, Indonesia, Thailand, Malaysia and the Philippines, have tightened monetary policy since early 2022 to counter high inflation. After a series of recent rate hikes led by the US Federal Reserve, most central banks worldwide now signal that further rate increases may not be necessary.

For example, Indonesia's PT Bank Rakyat Indonesia (Persero) Tbk is expected to see NIM grow to 8.01% in 2023 from 6.80% in 2022, before slipping to 7.98% in 2024. PT Bank Mandiri (Persero) Tbk's NIM is projected to edge up to 5.50% in 2023 from 5.47% in 2022 and then to 5.55% in 2024. Singapore's DBS Group Holdings Ltd., the region's largest bank by assets, is expected to see NIM rise to 2.06% in 2023 from 1.75% in 2022 before declining to 1.97% in 2024.

Lenders in Southeast Asia — a major region for global trade and commodity exports — are set to report second-quarter earnings amid expectations of a global economic slowdown. The International Monetary Fund expects global economic growth to slow to 3% in 2023 and 2024, from 3.5% in 2022. The IMF's revised growth estimate released July 25 was higher than the 2.8% expansion it predicted in April.

Stable incomes

Lending growth and higher margins are set to grow net interest income (NII) at regional banks in 2023. Nine of the 11 banks are expected to report higher NII in 2023, though two Malaysian banks — Malayan Banking Bhd. and CIMB Group Holdings Bhd. — may see declines.

Indonesia's Bank Rakyat will see NII rise to $9.03 billion in 2023 from $8.40 billion. Bank Mandiri's NII is projected to hit $6.62 billion in 2023 and $7.22 billion in 2024, up from $5.92 billion in 2022.

Bank Rakyat is showing more meaningful expansion this year as it focuses on higher-yielding nonsubsidized micro and ultra-micro loans, PT Yuanta Sekuritas Indonesia analyst Swie Cu Yap told Market Intelligence. "This year, the pressure in funding cost seems to have eased, in line with the expectation of flattish market rate," Yap added.

All 11 banks are expected to report higher NII in 2024.

Reviving bank loan growth follows Indonesia's projected 4.8% GDP growth in 2023 and 5% in 2024, one of the highest in the region. Ratings said in its July 20 global banking outlook report that it expects loans to hit the upper end of banks' 10% to 12% guidance for 2023.

Several banks are expected to increase loan loss provisions in 2023 and 2024. Major Singapore lenders DBS, United Overseas Bank Ltd. and Oversea-Chinese Banking Corp. Ltd. may see higher provisions, while Malaysian banks Malayan Banking Bhd. and CIMB Group Holdings Bhd. may see declines in 2023. Ratings noted asset quality issues should remain manageable for Malaysian banks, with restructured loans totaling about 2%.