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This article first appeared in The Edge Financial Daily on November 27, 2017

KUALA LUMPUR: Commercial banks, which have suffered shrinking net interest margins (NIMs) for more than three years, are likely to see wider margins next year, should Bank Negara Malaysia’s (BNM) hawkish policy translate into an overnight policy rate (OPR) hike.

Investment analysts opine that banks would see their NIMs widen when the central bank raises its OPR.

However, the current soft loan growth and the expected increase in deposit rate in line with an OPR hike would minimise the positive impact on the bank’s bottom line. The consensus estimates are that BNM is likely to raise its OPR by 25 basis points.

“Over the short term, the repricing of the loans will be ahead of adjustments on the deposit rate, so this will be positive for interest income at least for one to two quarters after the OPR hike

“Later this would be neutralised by the [increase] in deposit rates,” AmInvestment Bank analyst Kelvin Ong told The Edge Financial Daily.

Ong said that the level of impact on individual banks would vary, depending on their composition of variable interest rate and fixed interest rate loans in its respective portfolios. “It comes down to the percentage of the variable rate and fixed rate loans that the individual bank has, and the maturity period of the deposits placed with the bank as well.

“Deposits which are locked in for [a] longer tenure, for example fixed deposits, would be more advantageous as there is a longer time [before the higher interest paid neutralises the higher interest rates on loans earned by the bank],” Ong explained.

NIMs of Malaysian banks have been declining irrespective of interest rate direction since 2014 mainly due to the rising cost of funding, according to Nomura Securities analyst Tushar Mohata, and this was a major cause of return of equity erosion among the banks over the last five years.  “However, with loan growth having slowed, deposit growth is outpacing loan growth for the first time in a while, and banks have improved NIM guidance — from an earlier guidance of five to 10 basis points compression to a low single-digit compression .

“The policy rate hike could have a marginally positive impact on NIM for Malaysian banks in this scenario,” he told The Edge Financial Daily.

Tushar concurred that the impact would be more positive for banks with a high proportion of variable rate loans and high long-dated term deposits. “However, given that credit growth is slow to begin with, a hike in interest might delay the expansion in banks’ loan book further. So even though NIM will increase marginally, the positive impact might be somewhat offset by a slow loan growth as a result of rate hike,” he said.

MIDF Research senior analyst Imran Yassin Yusof opined that though there is expected to be an improvement in NIM from the OPR hike, its positive impact would be somewhat moderated by the implementation of the MFRS 9 — financial instruments accounting standard next year, whereby banks are required to estimate expected credit losses throughout the lifetime of the loans given. “With MFRS 9 next year, provisions could be higher for banks, but these could be moderated by higher NIM earned

“This of course would depend on the timing of the OPR hike as it would take time for the repricing of loans to be reflected. It wouldn’t be like today there is an OPR hike and tomorrow you get a new loan pricing. It takes at least one or two months” he said when contacted by The Edge Financial Daily.

On whether the OPR hike is a strong enough catalyst for investors to relook at banking stocks, AmInvest’s Ong opined that it is one, but it won’t be the sole catalyst driving the banking sector next year. “Some of the banking stocks have started to look attractive due to the recent retracement in share prices; other positive is the reduction in competition among banks for deposits due to deferment of net stable funding ratio to Jan 1, 2019 [from Jan 1, 2018], which would be more favourable to NIMs.

“Stronger improvement in capital market deals would also help to boost the non-interest income portion of banks,” he said.

On stock picks for the sector, Nomura’s Tushar has maintained its “buy” call on Public Bank Bhd and CIMB Group Holdings Bhd. “We believe Public Bank’s underperformance should reverse as the company is one of the best proxies for the Malaysia consumer [sentiment] recovery, with 93% of its loan book coming from Malaysia and mainly in retail, and its resilient asset quality means that provisioning is less likely to impact earnings negatively.

“We view CIMB as the only meaningful turnaround story in terms of ROE (return on equity), which we forecast will rise from 8.2% in 2016 to [about] 10% in 2018, notwithstanding the impact of MFRS 9. This is mainly due to its earnings recovery as credit costs decline, and its cost initiatives such as the proposed securities joint venture [with China Galaxy Securities Co], which are likely to positively contribute to earnings in 2018,” said Tushar.

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