According to Rakuten Trade’s head of research Kenny Yee, the banks will also see an expansion in net interest margins (NIMs) in the longer term. “Usually in the bigger picture, the margins on loans will be more than deposit rates,” Yee said.
KUALA LUMPUR: The banking sector is one of the short-term beneficiaries from Bank Negara’s move to normalise the overnight policy rate (OPR) by 25 basis points (bps) higher to 2.25%.
When contacted by StarBiz, analysts opined that banks are well poised to gain from the interest rate differential between loans and deposits, although this would neutralise when all loans and deposits portfolios are adjusted.
According to Rakuten Trade’s head of research Kenny Yee, the banks will also see an expansion in net interest margins (NIMs) in the longer term.
“Usually in the bigger picture, the margins on loans will be more than deposit rates,” Yee said.
He noted that there were some market concerns that the OPR hike would be detrimental to loan growth, although this may be temporary since the increase is at a manageable quantum and interest rates are on an upward normalising trend from a low base.
In line with the global cut in interest rates around, the OPR in Malaysia had been reduced to a record-low level of 1.75% when the Covid-19 pandemic struck two years ago.
Bank Negara had reduced the OPR five times and lowered rates by a cumulative 125 bps during the first half of 2020 to a record low of 1.75% to keep the economy moving at that time.
Bank Negara increased the OPR by 25 basis points to 2.25% on Wednesday following an increase by 25 basis points from a record low of 1.75% in May. The increase in May was the first increase in the OPR since January 2018.
“The overall risk sentiment isn’t too supportive for equity markets and this is why the bank stocks didn’t go up. Also, market consensus has priced in a rate hike to bank stocks.We think there would be at least two more hikes. It seems that the whole world is moving towards increasing interest rates now and Bank Negara has to follow suit to stem or at least slow any potential outflows,” said Rakuten Trade head of equity sales Vincent Lau.RHB Research, in its note yesterday
Banks that are listed on Bursa Malaysia saw mixed share price movements yesterday with most FBM KLCI heavyweights trending down. Malayan Banking Bhd
fell four sen to RM8.58, CIMB Group Holdings Bhd declined one sen to RM5.09 and Public Bank Bhd lost three sen to RM4.36.
RHB Bank Bhd fell seven sen to RM5.65, Hong Leong Bank Bhd lost 20 sen to RM20.18 while AmBank Holdings Bhd gained six sen to RM3.85.
“The overall risk sentiment isn’t too supportive for equity markets and this is why the bank stocks didn’t go up. Also, market consensus has priced in a rate hike to bank stocks.We think there would be at least two more hikes. It seems that the whole world is moving towards increasing interest rates now and Bank Negara has to follow suit to stem or at least slow any potential outflows,” said Rakuten Trade head of equity sales Vincent Lau.RHB Research, in its note yesterday, estimated that the latest rate hike would raise the banking sector’s 2022 net profit by 1.8%.
Another potential rate hike of 25 basis points in September would improve the cumulative earnings by 2.2%, it said.
“We believe there are risks from the upward revision in net interest income, which could be offset by potentially lower fee income, given the volatility in financial markets. We are projecting a 5% year-on-year growth in sector earnings for 2022.
“The path to monetary policy normalisation would be moderately positive for banks’ NIMs, providing a cushion for any downside risks from rising macroeconomic challenges,” it added, while maintaining an “overweight” call on the banking sector.
Meanwhile, CGS-CIMB Research said the hike was expected by 17 out of 19 economists that were polled by Bloomberg.
“We expect Bank Negara to make another 25 bps hike at its Monetary Policy Committee (MPC) meeting in September, and stand pat at its November MPC meeting, ending the year with an OPR of 2.5%. For next year, we price in a 50 bps rate hike, putting the end-2023 OPR forecast at 3%,” CGS-CIMB Research said.
It expected the OPR hike to be positive for banks as their total floating rate loans are higher than their total fixed deposits.
“We have factored in a total hike of 50 bps in 2022 in our earnings forecasts for banks. Every additional 25 bps hike would increase our net profit forecasts for banks by an estimated 2.1%,” the research house said.
It said the positive impact from the OPR hike on banks’ NIMs would outweigh any potential negative impact on loan growth and asset quality.
It said the hike would have the largest positive impact to Bank Islam Malaysia Bhd’s financial year 2023’s net profit forecasts.
