Maybank IB remains positive on banking sector on rising interest rates

KUALA LUMPUR (June 23): 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 the banks in terms of the return on equity (ROE), which could return to over 10% in financial year 2023 (FY23).

"Additionally, we think that 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 expects Bank Negara Malaysia (BNM) to raise the overnight policy rate (OPR) by 50 basis points (bps) in the second half of 2022, taking the total rate hike to 75bps in 2022, with a further 50bps increase in 2023.

It noted that with the US Federal Reserve (Fed) raising the US federal funds rate by 75bps to 1.5%-1.75% on June 15, the interest rate differential between Malaysia's OPR — which currently stands at 2% — had narrowed to just 25bps from as wide as 300bps in 2014/15.

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

"With the latest aggressive Fed move, we now expect BNM to raise the OPR by another 25bps in the next Monetary Policy Committee meeting on July 5-6, with the prospect of another 25bps hike by end-2022.

"This would raise the OPR to 2.5% by end-2022 from 1.75% 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%," Maybank IB said.

It noted that rate hikes generally would have a positive short-term impact on the 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 NIMs to increase in full to reflect the expected 75bps rate hike this year and the 50bps increase in 2023.

"On average, this is expected to result in a 1%-3% increase in earnings this year and a 2% to 5% earnings increase in 2023.

"ROEs are expected to expand by 0.2 percentage point in FY22 and 0.3 percentage point in FY23. Positively, most banks should see ROEs of more than 10% in FY23 as a result of the expansion in NIMs," 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 the banks having set aside pre-emptive provisions over the past two years, we believe that the banks have sufficient provisions to buffer against such an eventuality," it added.