Banking Sector - 9M2023 Update

Banks’ return on average assets (ROAA) declined to 1.5% in 9M2023 from the 5Y peak of 1.7% in 2022, as credit growth weakened and funding costs surged following consecutive interest rate hikes beginning in Q4/2022. The sector-average non-performing loan (NPL) ratio worsened to 2.2% from 1.6% in 2022, mainly from retail and small and medium enterprises (SME) loans. Loan loss coverage ratio (LLCR) fell to 93% from 123% in 2022 and bank capital remained weak. We expect banks’ net interest margins (NIM) to widen from Q4/2023 onwards as deposits adjust quicker to lower rates than loans. Credit demand will also pick up over time to improve bank profits.