Base rate to stir up competition among banks

KUALA LUMPUR: The new base rate (BR) mechanism will stir up competition among banks and Affin Hwang Investment Research expects banks which have set a lower BR and effective lending rates (ELR) such as Maybank and Public Bank, which also have strong niche in consumer financing, will have an initial edge. 

“Nonetheless, loan pricing will still depend on management’s risk appetite. Maintain Neutral on the sector,” it said on Monday, adding its top stock picks are Public Bank and Hong Leong Bank.

Affin Hwang Research expects the various banking institutions to offer borrowers the ELR based on the new BR.  The new ELR is based on the BR, which is the banks’ benchmark funding cost as well as a spread, of which is comprised of a liquidity premium, credit risk, overheads, statutory reserve requirements (SRR) and a profit margin. 

“Apparently, Maybank’s BR is the lowest at 3.2% followed by Public Bank at 3.65%, Standard Chartered at 3.67% and Citibank at 3.7% while the rest of the banks base rate have been set at an average 4%. 

“The shift to the benchmarking against funding cost allows banks to adjust the future ELR accordingly to match movements in their cost of funds due to fluctuations in KLIBOR as well as potentially higher funding costs that may arise in future,” it said.

The research house expects the implementation of the new BR mechanism to stir up competition among banks. Nonetheless, the outcome will depend on the final ELR being offered to borrowers.

Affin Hwang Research said it does not think that the implementation will significantly improve a banks’ bottomline over the longer run though accepting customers with a higher risk profile will enable a bank to price the ELR higher and hence earn a more profitable net interest margins (NIM). 

However, that would mean potentially higher default rates in future and any loan pricing will still be dependent on management’s risk appetite.

The research house maintained its Neutral rating on the Malaysian banking sector given a muted earning outlook going into 2015, as we foresee continuous NIM pressure, further weakening in loan growth, lacklustre capital market activities (due to heightened risk-aversion). 

“Overall, given the new BR framework, we believe that the impact on banks’ profitability will be relatively immaterial, and hence banks with a strong niche for consumer financing such as Public Bank, Maybank, Hong Leong Bank and Alliance Bank will continue to defend their franchises. 

“For sector exposure, we favour Public Bank and Hong Leong Bank, given a more stringent track record in credit underwriting standards and niche in the domestic retail financing markets,” it said.

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