The rating agency said in a report that Malaysian banks were among the first in Southeast Asia to experience net interest margin compression in early 2023, and it expects their margins to hold steady next year in line with the Malaysian Central Bank policy rate.
However, it said the sector's growth opportunities are constrained by high household leverage.
Fitch also expects Malaysian banking loan growth, at about 5 percent, to lag nominal gross domestic product (GDP) growth for the fourth consecutive year.
Meanwhile, Fitch foresees the sector's impaired-loan ratios likely to rise marginally as borrowers navigate higher financing costs and debt relief continues to roll off.
"We expect banks to continue to draw down on existing reserves to limit the increase in credit costs, thereby contributing to steady profitability," it said.
While deposit rates have risen significantly in 2023, Fitch expects the sector's funding tightness to abate by the end of 2023 as pricing adjusts fully and loan growth moderates.
"Liquidity conditions have eased, and we do not expect banks to face difficulties in accessing deposit and wholesale funding," it added.
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