‘Banking sector to benefit most from OPR hike’

Earnings may increase between 0.9 and 2.4pc in this financial year, says analyst

THE local banking sector will benefit the most from Bank Negara Malaysia’s move on Thursday to raise the Overnight Policy Rate by 25 basis points (bps) to 3.25 per cent, say some economists.

It is mostly expected to positively impact banks’ earnings in the 2018 financial year.

“We could expect the banks’ net profits to increase by 0.9 to 2.4 per cent,” said AmBank Group chief economist and head of research, Anthony Dass, in a note.

“Given the positive impact, we remain overweight on the banking sector with an expected improvement in earnings this year compared to 2017,” he said.

Dass also said the sector would be underpinned by higher noninterest income resulting from stronger capital market activities as well as an improvement in net interest income from modest loan growth of five per cent and marginally higher net income margin (NIM).

In response to the OPR hike, CIMB Bank Bhd and CIMB Islamic Bank Bhd have announced increases in its Base Rate and Fixed Deposit Board Rates by 0.25 per cent.

Similarly, loans and financing based on Base Lending Rate (BLR) and Base Financing Rate (BFR) will also be increased by 0.25 per cent effective February 2.

Bank Islam Malaysia Bhd’s chief economist Mohd Afzanizam Abdul Rashid concurred with Dass that the banking sector would be the clear winner from the OPR hike.

“G e n e r a l l y, it should be positive because the rise in the OPR comes at a time when the economy is growing at a fast clip. That would mean businesses are in the midst of incurring their capital expenditure which would result in demand for financing.

“Fu r t h e r m o r e, labour i ncome growth would ensure that debt servicing ability among borrowers remains intact which suggests that asset quality in the banking system will improve.

“In the short term, banks NIM would be expanded following the upward adjustment in the BR as financing that is based on variable rates would be re-priced higher while FD rate would take some time to be reset,” he said.

Afzanizam said the bond markets could experience some volatility as higher rates might result i n higher bond yields, which then mean l ower bond prices since interest rates and bond prices are inversely related.

“This i n turn could affect banks’ Available for Sale portfolio to some extent. However, the inflows from foreign funds could help mitigate the rise in yields as Malaysia is seen to be among the earliest to raise interest rates in Asia after South Korea,” he added.

Given the positive impact, we remain overweight on the banking sector with an expected improvement in earnings in 2018.

ANTHONY DASS AmBank Group chief economist and head of research