Interest rate hike a mild booster to banking sector’s earnings
KUALA LUMPUR: An interest rate hike will likely be a mild booster for earnings in Malaysia’s banking sector.
Based on its calculations, the research arm of AmInvestment Bank Bhd (AmInvestment) noted that an interest rate increase could boost banks’ net profits by 0.9 per cent to 2.4 per cent.
“An interest rate hike will have a temporary positive impact on banks’ net interest income (NII) as banks’ loan rates will be repriced higher, adjusting to the hike in the overnight policy rate (OPR) before deposit rates catch up.
“We expect the lagged impact of the deposit rates to be two to three months after the adjustment in loan rates,” it said.
“We have simulated the impact of rate increase on earnings of banks, assuming that a 25 basis points (bps) hike occurs in the second half of 2018 (2H18).
“This simulation is based on assumptions of: two months’ lagged impact from the repricing of domestic deposit rates, banks with financial year-end (FYE) December simulated with their financial year 2018 (FY18) numbers while banks with FYE March or June are assessed based on their FY19 earnings.
“From our estimates, a 25bp increase in the interest rate could increase banks’ net profits by 0.9 per cent to 2.4 per cent,” it projected.
It highlighted that the extent of benefits to earnings would depend on the following in respective banks such as percentage of floating rate loansm and percentage of domestic to total loans well as the timing of the rate hike relative to the bank’s FYE.
Meanwhile, AmInvestment noted that Bank Negara Malaysia’s (BNM) more hawkish tone has hinted a potential review of monetary accommodation, which may see a revision of 25 to 50 basis points (bps) in the OPR in 2018.
“This could normalise the benchmark interest rate back to 3.50 per cent,” it said.
It projected one to two rate hikes (25bps each) in 2018, which will be mildly positive on banks’ earnings.
The research team maintained an ‘overweight’ call on the sector.