PETALING JAYA: Banks may face a tougher path to further valuation re-rating as renewed volatility in Malaysian Government Securities (MGS) clouds visibility on non-interest income (NOII), although the latest bond sell-off is unlikely to derail sector-wide earnings, according to Hong Leong Investment Bank (HLIB) Research.
The research house maintained its “neutral” stance on the banking sector, saying the more pressing concern is the possibility of repeated bond repricing before higher reinvestment yields can rebuild banks’ investment carry.
“The bigger concern is not the initial MGS shock itself, but ongoing repricing before reinvestment benefits catch up,” HLIB Research said.
The 10-year MGS yield had risen to 3.94% as at Sept 25 from 3.6% at end-June, after touching 4.18% on Sept 11.
With the overnight policy rate unchanged at 2.75%, banks are absorbing the mark-to-market (MTM) impact from higher long-end bond yields without a corresponding policy-rate-driven increase in loan yields.
HLIB Research said this creates a near-term asymmetry, with MTM losses recognised immediately while the benefit from higher reinvestment yields only emerges as securities mature or portfolios are recycled.
“MTM pain first, carry relief later,” it said, adding that the current rates environment is primarily an earnings-visibility issue rather than a threat to underlying banking fundamentals.
The risk could persist given the stronger relationship between US Treasury and MGS yields.
At the individual-bank level, AMMB Holdings Bhd
and Bank Islam Malaysia Bhd (BIMB) have the highest exposure to near-term MGS-driven NOII swings.
Under HLIB Research’s 30-basis-point MGS yield shock scenario, gross MTM losses amount to about 10% of their respective projected NOII.
CIMB Group Holdings Bhd has the largest absolute sovereign FVTPL exposure at RM12.2bil, but its larger income base limits the impact to about 4.5% of FY26 NOII.
On the book-value front, BIMB, Alliance Bank Malaysia Bhd (ABMB) and Public Bank Bhd are more sensitive through their FVOCI portfolios, with estimated MTM impacts equivalent to 1.1%, 1% and 0.9% of shareholders’ equity respectively.
HLIB Research considers the impact manageable.
The research house said higher yields would eventually provide a carry benefit.
Every 50-basis-point increase in reinvestment yield on RM1bil of securities could add about RM5mil in annual pre-tax carry once fully reflected, although the timing depends on securities maturities and portfolio recycling.
The research house noted that foreign investors recorded about RM1.3bil of net outflows from Malaysian banking stocks between July 1 and Sept 25, while higher fixed-income yields could make bank equities relatively less attractive to income-seeking investors.
The research house upgraded Public Bank to “buy” and named it its 4Q26 top pick, while downgrading AMMB, CIMB and RHB Bank Bhd to “hold” as the re-rating hurdle rises. It also continued to favour ABMB for its potential KLCI-related catalyst.
An analyst told Starbiz that he is still positive on the banking sector due to strong business lending, wealth management and potential dividend distributions continue to outweigh the risks.
Business-loan demand has been particularly strong in construction, non-residential property and data centre-related projects.
