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Bank Negara Malaysia (BNM) announced a further increase in the Overnight Policy
Rate (OPR) by 25bps to 3.00%. The Statutory Reserve Requirement (SRR) was also
further increased by 100bps to 3.00%. The increase in interest rate is unlikely to
impact loans growth or asset quality as average lending rates remains low and
accommodative of growth in part due to the highly competitive lending environment.
Despite Base Lending Rates (BLR) now closing in on the 10 year post financial crisis
average levels of 6.6%, average lending rates (ALR) at 5.10% is still significantly
below 10-year historical average levels of 6.4%. The increase in interest rates will also
help to stabilize margins and more so with banks that have a high percentage of
floating rate loans and sticky low cost CASA deposits. Maintain OVERWEIGHT on
sector and our top big cap pick remains CIMB (FV:RM9.77) and Maybank
(FV:RM10.07).
Average lending rates remain accommodative. This is the third rate hike cycle over the
past decade post-Asian Financial Crisis (1997/98), with the last cycle occurring from Mar 10
to July 10. We continue to view the ongoing interest rate hike as an interest rate
normalization process rather than severe tightening. Also worth noting is the fact that despite
Base Lending Rates (BLR) now closing in on the 10 year post financial crisis average levels
of 6.6%, average lending rates (ALR) at 5.10% are still significantly below 10-year historical
average levels of 6.4%. As such lending growth and asset quality is unlikely to be severely
impacted from the ongoing rising interest rate environment as ALR remains accommodative.
Helps to stabilize margins but unlikely to see material uplift. Net interest margin
enhancement will only be marginal given the level of competition in both the asset (loans)
and liability (deposits) side of the business. As shown in figure 1 below, owing to the intense
competition from the asset side of the business, ALR had only risen by 34bps in the last
interest rate cycle hike in early 2010, despite BLR having risen by a larger 76bps. On the
deposit side of the business we noted that fixed deposits across most tenure have risen by a
similar quantum to the increase in OPR and BLR in the recent interest rate hike cycle, unlike
in 2005/06 when the quantum of increase in fixed deposit rates were only half of that of
lending rates translating into a much stronger incremental uplift in net interest margins.
Given the rising trend in industry loans to deposit ratio now reaching the 83% level coupled
with an outlook of further interest rate hikes, competition for deposits is likely to remain
intense. As such banks with relatively high levels of sticky low cost CASA deposit will benefit
with Maybank, Alliance Financial Group and CIMB having the top three highest CASA ratio.
Alliance Financial Group and Maybank top two beneficiaries. Banks that will benefit the
most are those with: 1) the largest percentage of floating rate loans, 2) largest percentage of
low cost deposits, whose rates will only increase marginally, and 3) small securities held for
trading portfolio as bond value is negatively correlated to interest rates, leading to higher
marked to market losses in a rising interest rate environment. Maybank (High CASA: 37% of
total deposits), Alliance Financial Group (High CASA: 34% and Floating rate loans: 84%),
CIMB (High Floating rate loans: 73% and CASA 33%) and HLBank (High Floating rate
loans: 77%) are among a key beneficiaries.
most are those with: 1) the largest percentage of floating rate loans, 2) largest percentage of
low cost deposits, whose rates will only increase marginally, and 3) small securities held for
trading portfolio as bond value is negatively correlated to interest rates, leading to higher
marked to market losses in a rising interest rate environment. Maybank (High CASA: 37% of
total deposits), Alliance Financial Group (High CASA: 34% and Floating rate loans: 84%),
CIMB (High Floating rate loans: 73% and CASA 33%) and HLBank (High Floating rate
loans: 77%) are among a key beneficiaries.
