PETALING JAYA: Over the past two weeks, the share prices of major banks in Malaysia have appreciated in tandem with the rise of FBM KLCI, leaving some observers wondering if the stabilisation in the overnight policy rate (OPR) has been a factor.
For example, the share price of RHB Bank Bhd had increased by 6 sen, or 1.08%, from Nov 1 close of RM5.58 to settle at RM5.64 last Friday; with AMMB Holdings Bhd
also closing 1.3%, or 5 sen, higher at RM3.87 from RM3.82 on Nov 1.
Other lenders that saw their stock price increase in value from the start of this month include CIMB Group Holdings Bhd and Malayan Banking Bhd, although admittedly a number of lenders have pared back their gains from the first week of the month, likely due to profit-taking activities.
The positive performances from these banks has helped push the FBM KLCI higher, from 1,435.33 on Nov 1 to close at 1,445.18 last Friday, notably after reaching a high of 1,464.67 on Nov 6, its highest level since Feb 22.
Analysts and fund managers, though, were not surprised by the willingness of investors to continue channeling their funds into the banking sector, and as Rakuten Trade head of equity sales Vincent Lau calls it, the current OPR is a sweet spot of sorts.
“The present OPR level is conducive for economic growth while the central bank continues keeping an eye on the inflation level.
“Although it may appear that a higher OPR could generate better interest income for banks, it will very likely lead to non-performing loan (NPL) stress,” he explained, adding that investing in banks also offers good yields.
Tradeview Capital chief investment officer Nixon Wong told StarBiz that banking stocks are often considered a stable and essential part of a diversified investment portfolio.
“Even when interest rates plateau, banks will continue to generate steady income through a range of financial services including loans, mortgages and wealth management.
“Moreover, banks frequently distribute dividends to shareholders, ensuring a consistent income stream.
“Investors, especially those seeking regular earnings, are drawn to banking stocks because of these dividends, even in periods of stable interest rates,” he said.
As banks are closely tied to the overall economic health of a country, signified by the demand for banking services as a country’s economy expands, Wong said investors may perceive banking stocks as indicators of growth, irrespective of fluctuations in interest rates.
In addition, he noted that a stable OPR would also allow lenders the room they need to re-optimise their product margins, thus possibly leading to better profitability.
“The confidence and sentiment of investors are crucial factors and as such, positive government policies can enhance confidence and attract investments, regardless of prevailing interest rate trends,” he said.
Notably, Wong re-emphasised the well-known fact that banking counters hold significant weight in the FBM KLCI, making them a prime sector for foreign investors looking to gain exposure to Malaysia’s growing economy.
While generally optimistic about the banking industry, Wong suggested for investors to be selective on stock names based on the loan portfolio composition of the respective lenders.
“We are expecting solid performance in loans for small-medium enterprises and businesses due to the enhanced political stability in Malaysia, which has positively influenced business sentiment.
“However, potential softness in household loans could counterbalance this, as borrowing costs for home buyers might be less favorable,” he said.
Overall, Wong reiterated his positive stance in the country’s improving economic health and its move toward fiscal discipline, as demonstrated in the recently unveiled Budget 2024.
RAM Rating Services Bhd co-head of financial institution ratings Wong Yin Ching said the agency is keeping a “stable” outlook on the domestic banking system, as it believes the robust credit fundamentals of the industry will provide a solid foundation to withstand heightened uncertainties.
“In the first eight months of 2023, annualised loan growth eased to 4.1% from the 5.7% of 2022, weighed down by weak global trade, higher interest rates and cost pressures.
“Credit demand was also impacted by diminishing post-lockdown pent-up spending,” she said.
Looking ahead to 2024, Yin Ching expects loans to grow by 4% to 5%, taking into consideration Malaysia’s gross domestic product growth forecast of 4.5% to 5.5%, strong local labour market and a stable overnight policy rate of 3%.
Meanwhile, giving a nod to what other observers have been commenting about the banking industry, CGS-CIMB Research is reaffirming its “overweight” call on the sector, premised on positive numbers from September.
In its note from earlier this month, it reported that the 2.6% – equivalent to RM972.5mil – month-on-month drop in gross impaired loans (GILs) among lenders in September has led to an improvement in GIL ratio to 1.72% from 1.78% at the end of the previous month.
“This has erased the uptrend in GIL ratio in the first eight months of 2023, as the GIL ratio at the end of September 2023 was unchanged compared to the level at end-December last year.
“Moreover, total provision of the banks declined by RM415.7mil quarter-on-quarter (q-o-q) in the third quarter of 2023 (3Q23),” it said
As such, the research outfit is expecting 3Q23 loan loss provision (LLP) to not exceed the level of RM1.34bil of the second quarter, indicating a more stable and lower provision q-o-q.
With this, CGS-CIMB Research said LLP would potentially decline by more than 30% year-on-year (y-o-y) in 3Q23 from the much higher level of RM2.07bil in 3Q22, with the reduction partly coming from the writeback of management overlay, which is one of its key investment themes for banks.
It also said that loan growth had inched up to 4.3% y-o-y at the end of September from August’s 4.2%, adding that the improvement was mainly attributable to the pick-up in business loan growth from 0.7% y-o-y at the end of August to 1.6% y-o-y the next month.
