Malaysian banking sector outlook optimistic given hiking rates

KUALA LUMPUR – The outlook on Malaysia’s banking sector remains optimistic given that the rising interest rates are generally beneficial for the revenue of banks, according to Maybank Investment Bank Bhd (Maybank IB).

In a recent note, the investment bank stated that the hiking rates should also be beneficial to banks in terms of the return on equities (ROEs), which might return to being greater than 10% in the financial year of 2023 (FY23).

“Furthermore, we think that the current yields on Malaysian Government Securities (MGS) have already seemed to reflect the future rate hikes. As a result, the future mark-to market losses are likely to be contained, if any,” it explained.

Additionally, Maybank IB believes that the banks have enough provisions in order to buffer against potential asset quality concerns that are a result of higher borrowing costs.

The investment bank said that Bank Negara Malaysia (BNM) is expected to increase domestic Overnight Policy Rate (OPR) by 50 basis points in the second half of the year (2H2022). That would bring the overall rate hike to 75 basis points for 2022.

It also added that another 50 basis points increase to the OPR is likely to occur in 2023.

It highlighted that as a result of the US Federal Reserve (Fed) increasing the US Federal Funds Rate (FFR) by 75 basis points to 1.5% to 1.75% on June 15, the difference between Malaysia’s OPR rate, currently at 2%, has shrunk to just 25 basis points. The highest differential between the two that was ever recorded was 300 basis points in 2014/2015.

The Fed’s most recent “dot plot” indicates another 175 basis points increase over the remaining four more Federal Open Market Committee (FOMC) meetings for this year. It is anticipated that the current rate hike cycle will end early 2023 at 3.75%. That would imply a total of 200 basis points hike for interest rates between now and early next year, the note explained.

Because of the latest aggressive move by the Fed, Maybank IB now expects Malaysia’s central bank to increase the OPR by another 25 basis points in the coming Monetary Policy Committee meeting on July 5 to 6, with the possibility of another 25 basis point increase by the end of this year.

“That would bring the OPR to 2.5% by the year end, from the 1.75% at the beginning of 2022. This would represent a cumulative 75 basis points rate increase for the year while we are projecting another 50 basis points OPR hike in 2023, bringing the total to 3.0%,” Maybank IB added.

It was pointed out in the note that rate increases generally have a short-term positive impact on banks’ net interest margins (NIMs) due to higher loan yields on variable rate loans and higher bond yields. However, the funding costs would take an average of roughly three to six months in order to normalise, given that this is the common duration of fixed deposits in the system.

Maybank IB does not anticipate that the banks’ NIMs will increase in full to reflect the projected 75 basis points rate hike for this year and the 50 basis points increase for 2023. This is due to the fact that OPR hikes are expected to be staggered throughout the year and that there will eventually be an upward adjustment to funding costs.

“The expected results, on average, would be a 1% to 3% growth in earnings for 2022 and about 2% to 5% earnings growth in 2023,” the note said.

As for the ROEs, Maybank IB anticipates a 0.2 percentage points expansion for the financial year of 2022 with FY23 to mark 0.3 percentage points expansion.

“Positively, most banks should see the ROEs greater than 10% in FY23, as a result of the banks’ NIM expansion,” it added.

In addition to that, in light of Malaysia’s inflationary pressures and a volatile external environment, the increase in interest rates could also serve to further constrain domestic consumption, as borrowing costs are hiking.

“As a result, we remain wary that there might be a possibility of deterioration in asset quality. However, as banks have set aside sufficient provisions over the past two years, we believe that there is enough provisions to buffer against such a situation,” it continued.

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