PETALING JAYA: A rising bond yield environment following the recent 25 basis points (bps) hike in the United States’ interest rate may be a dampener on local banks’ profit outlook in the short to medium term.
iFast Capital senior research analyst for global fixed income Cheong Ting Fung said the rise in Malaysian Government Securities (MGS) yields would make wholesale funding more expensive for banks, translating into slight net interest margin (NIM) compression.
“The rise in MGS yields makes wholesale funding more expensive for banks, and this is likely to translate into slight NIM compression,” Cheong told StarBiz.
“On top of this, combined with a quarter-on-quarter decline in treasury income and softer loan growth, partly reflecting banks’ own deliberate credit tightening, we expect a more challenging operating environment to translate into a lacklustre set of upcoming earnings,” he said.
Cheong also sees little likelihood of a meaningful easing in the 10-year MGS yield from current levels.
“At the current juncture, we see only a slim chance of the 10-year MGS easing meaningfully from present levels.
“Domestic political uncertainty appears to be the dominant overhang, outweighing other factors such as the severity of the El Nino phenomenon and spillover effects from global yield repricing, partly driven by oil price volatility,” he said.
He added that the pressure on NIMs could be compounded by stronger competition for deposits.
“NIMs are likely to stay under pressure as higher wholesale funding costs push up banks’ overall cost of funds,” Cheong said.
“This is compounded by intensifying deposit competition, with digital banks and e-wallets continuing to draw retail deposits away from incumbents, a dynamic that is likely to push conventional banks toward offering higher deposit rates, further squeezing funding costs and NIMs,” he added.
Meanwhile, iFast Capital manager for global fixed income Kevin Khaw said Malaysian government bond yields had undergone a sharper-than-expected repricing in the second half of financial year 2026 (2H26), driven by higher US Treasury yields, elevated oil prices and greater domestic political uncertainty.
“While the recent rise in MGS yields has been more pronounced than in US Treasuries, strong foreign inflows in August suggest that investor demand for Malaysian government bonds remains resilient, supported by Malaysia’s resilient economic growth and contained inflation,” Khaw said.
He also expects the higher-yield environment to persist through the remainder of the year.
“With global inflation risks and domestic political uncertainty likely to persist, we see little room for MGS yields to retrace lower in 2H26, as global yield repricing and domestic political uncertainty continue to weigh on market sentiment with risks tilted to the upside.
“In short, we expect the yield environment to remain until year-end 2026,” he said.
Against this backdrop, Khaw continues to favour the three-to-five-year segment of the bond market, which he said offers a more attractive balance between yield and interest-rate risk, while remaining cautious on longer-duration bonds.
Anticipating a rate hike in the United States, the Malaysian 10-year MGS bond yields saw a sharp rise to 4.2183 last week and at the time of writing, it last traded at 3.9250.
Tradeview Capital portfolio manager Ng Tzyy Loon said the extent of mark-to-market losses for banks in the third quarter would depend largely on their fixed-income strategy and the composition of their treasury portfolios.
He said the rise in yields for 10-year MGS had been larger than for shorter-tenure bonds, meaning banks holding a greater share of longer-term securities would be exposed to larger fair-value losses.
“Secondly, it is about the mix of banks’ treasury assets, how many of them are held until maturity or marked to market.
“Those with a higher weightage on marked-to-market assets will show more fair-value losses on their profit and loss under current market conditions.
“So far, CIMB Group Holdings Bhd
, Malayan Banking Bhd (Maybank) and AMMB Holdings Bhd look more exposed,” Ng said.
On whether the 10-year MGS yield could ease towards year-end, Ng said much would depend on Bank Negara Malaysia’s (BNM) future decision on the overnight policy rate (OPR).
“Theoretically speaking, if BNM decides to raise rates, the yield should go up.
“However, given that the yield has moved up so much before the next Monetary Policy Committee meeting, we think it is unlikely that the yield will move up significantly if an OPR hike kicks in.”
Ng, however, said he had not observed any significant impact so far from a higher-for-longer global interest-rate environment on local banks’ NIMs, funding costs and deposit competition.
Separately, BIMB Research said yesterday the impact of higher bond yields on Malaysian banks should remain manageable despite near-term mark-to-market pressure on their securities portfolios in the third quarter.
Global bond yields also rose after the US Federal Reserve increased the federal funds rate by 25 bps to 3.75% to 4% last week on Sept 16, its first rate increase in more than three years.
BIMB Research also said the 10-year MGS yield was expected to remain around 4% in the near term before gradually moderating towards 3.75% to 3.90% by year-end.
BIMB Research expects Malaysian government bond yields to ease as it believes the OPR will remain unchanged at 2.75% throughout 2026 and 2027, with the earliest possible 25-basis-point increase only in 2028.
It said current bond yields appeared to be pricing in close to two domestic policy rate hikes, a scenario it does not foresee.
“The OPR will remain unchanged, and coupled with a contained domestic inflation outlook, the 10-year MGS yield is expected to ease from its current elevated level over time,” it said.
BIMB Research said banks’ average securities portfolio duration of about five to six years remained moderate, limiting their sensitivity to interest-rate movements.It also noted that the bulk of banks’ securities portfolios are classified as fair value through other comprehensive income, meaning unrealised valuation movements generally affect reserves and shareholders’ funds rather than directly hitting earnings.
It noted that Maybank, CIMB and RHB Bank Bhd could benefit from their Singapore operations as higher Singapore Overnight Rate Average rates lift asset yields and support NIM expansion.
The research house remained positive on the banking sector, forecasting sector net profit growth of 3% in 2026 before accelerating to 7.3% in 2027, while dividend yields are expected to remain attractive at about 5% to 6%.
