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Maybank remains positive on banking sector on rising interest rates

23/06/2022 12:49 PM

KUALA LUMPUR, June 23 (Bernama) -- Maybank Investment Bank Bhd (Maybank IB) remains positive on the Malaysian banking sector’s outlook, as the rising interest rates are generally positive for banks’ earnings.

In a note, it said the rate hikes should also benefit banks in terms of the return on equities (ROEs), which could return to over 10 per cent in financial year 2023 (FY23).

“Additionally, we think that the current Malaysian Government Securities (MGS) yields seem to already reflect future rate increases, and thus the future mark-to-market losses are likely to be contained, if any.

“Moreover, we believe that the banks have sufficient provisions to buffer against potential asset quality issues arising from higher borrowing costs,” it said.

Maybank IB said it expected Bank Negara Malaysia (BNM) to raise the domestic Overnight Policy Rate (OPR) by 50 basis points (bps) in the second half of 2022 (2H2022), taking the total rate hike to 75bps in 2022, with a further 50bps increase in 2023.

It noted that with the United States (US) Federal Reserve (Fed) raising the US Federal Funds Rate (FFR) by 75bps to 1.5-1.75 per cent on June 15, 2022, the interest rate differential between Malaysia’s OPR -- which currently stands at two per cent -- has narrowed to just 25bps, from as wide as 300 bps in 2014/15.

The Fed’s latest “dot plot” signals another 175bps hikes over the remaining four Federal Open Market Committee (FOMC) meetings this year, with expectations that the current rate hike cycle ends in early 2023 at 3.75 per cent, which implies a total of 200bps rate hikes between now and early 2023, it said.

“With this latest aggressive Fed move, we now expect BNM to raise the domestic OPR by another 25bps at the next Monetary Policy Committee (MPC) meeting on July 5-6, with the prospect of another 25bps hike by end-2022.

“This would raise the OPR to 2.5 per cent by end-2022 from 1.75 per cent at the beginning of the year, representing a cumulative 75bps rate hike in 2022, and we project a further 50bps OPR hike in 2023, bringing it to 3.0 per cent,” Maybank IB said.

It noted that rate hikes generally have a positive short-term impact on banks’ net interest margins (NIMs) through higher loan yields on variable rate loans and higher bond yields, while funding costs would take an average of about three to six months to normalise, being the common duration of fixed deposits in the system.

Given the expected staggered OPR hikes throughout the year, coupled with the eventual upward adjustment to funding costs, Maybank IB does not expect the NIMs to increase in full to reflect the expected 75bps rate hike this year and +50bps in 2023.

“On average, this is expected to result in a 1.0-3.0 per cent increase in earnings this year and 2.0 to 5.0 per cent earnings increase in 2023.

“ROEs are expected to expand by 0.2 percentage points in the financial year 2022 (FY22) and 0.3 percentage points in FY23. Positively, most banks should see ROEs of more than 10 per cent in FY23 as a result of the expansion in NIM,” it noted.

Meanwhile, in light of the domestic inflationary pressures and a volatile external environment, the rise in interest rates could serve to further crimp domestic consumption, as borrowing costs rise.

“As such, we remain wary of a possible deterioration in asset quality. However, with banks having set aside pre-emptive provisions over the past two years, we believe that banks have sufficient provisions to buffer against such an eventuality,” it added.


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