PETALING JAYA: With Bank Negara raising its interest rate sooner than expected, it is a positive surprise for banks that were previously affected by margin compression.
Analysts forecast an improvement in net interest margin (NIM) of banks, albeit at varying degrees, following the increase in the overnight policy rate (OPR) from 1.75% to 2%.
Shareholders of banking stocks are also in for a treat, as dividend payout may likely increase on the back of improved earnings.
NIM is a measure of profitability for banks and refers to the difference between interest received and interest paid out by the banks.
MIDF Research said, in a note, that the underlying factors for the NIM improvement include the proportion of local and floating interest-rate loans as well as the percentage of net income derived from net interest income.
“Bank Islam Malaysia Bhd and Affin Bank Bhd are set to be the core beneficiaries of the OPR hike.
“We are not expecting any notable decline in loan growth in the immediate future, given still-robust leading indicators (loan application growth in March 2022 was 4.6% year-on-year, 47.8% month-on-month) and the strong recovering trend of both consumer and corporate demand,” it said.
MIDF Research is expecting another OPR hike of 25 basis points (bps) in the second half of 2022 (1H22), and in line with the expectation, the brokerage upgraded the earnings forecasts for all banks under its coverage universe.
For 2023, the brokerage anticipated another three rounds of OPR hikes, until the benchmark interest rate reaches its pre-pandemic level of about 3%.
On Wednesday, Bank Negara surprised the market by increasing the OPR by 25 bps, joining the wider trend of Asia-Pacific central banks.
In justifying the rate hike, Bank Negara asserted that domestic growth is already on a firmer footing, with the conditions necessitating an OPR of 1.75% having abated.
This was largely driven by strengthening domestic demand amid sustained export growth, investment activity and prospects, as well as higher labour participation.
The second core justification was inflationary pressures, exacerbated by prolonged supply-side disruptions, domestic policy measures, as well as commodity fluctuations stemming from the ongoing military conflict in Ukraine.
Maybank IBG Research estimated that every 25-bps hike in the OPR would raise earnings for the banks under its coverage by 1% to 3%.
“Key beneficiaries, in our view, would be Alliance Bank Malaysia Bhd, RHB Bank Bhd, AMMB Holdings Bhd and Public Bank Bhd, which could see an uplift in earnings of 2.6% each.
“At the lower end of the spectrum would be Hong Leong Bank, we believe, with an estimated 1% enhancement to earnings,” it said.
While higher interest rates are generally positive for banks’ margins, Maybank IBG Research highlighted that a more immediate concern would be the prospect of marked-to-market (MTM) losses from the rise in bond yields.
“The 10-year Malaysia Government Securities yield, for instance, currently stands at 4.35% versus 3.6% in December 2021. As such, we maintain our forecasts for now, as any improvement in margins would serve to buffer against such MTM losses,” it added.
Looking ahead, the research house expects a total of 50 bps hike this year and a 75 bps hike in 2023.
Meanwhile, Hong Leong Investment Bank (HLIB) Research pointed out that banks’ weighted base rate and base lending rate were up by 25 bps and 21 bps respectively, during the previous 25-bps rate hike in January 2018.
As for deposits, rates climbed by a similar quantum where one to 12 month fixed deposit rates jumped by 22 bps to 23 bps.
However, the rates for savings only ticked up six bps.
“In the first quarter of 2018 (previous 25 bps OPR hike), we saw NIM rose four bps sequentially and contracted in the following two quarters (due to upward re-pricing in deposits),” it said.
Similar to MIDF Research and Maybank IBG Research, HLIB Research has maintained its bullish view on the banking sector.
It said the banking sector’s risk-reward profile is skewed to the upside as valuations are undemanding and the economy is only at the cusp of an OPR hike upcycle with economic recovery, which benefits banks.
“As such, we remain bullish and employ a rather broad stock buying strategy in the first half of 2022.
“For large-sized banks, we like Malayan Banking Bhd for its strong dividend yield and Public Bank for its large potential headroom to perform management provision overlay writebacks.
“For mid-sized banks, RHB Bank is favoured for its high common equity tier-one ratio and attractive price-tag. As for small-sized banks, Bank Islam and Affin Bank are preferred. We like the former for its positive structural growth drivers and better asset quality while the latter has special dividend potential and strong financial metrics,” said HLIB Research.