With an increase in interest rates very likely in the near future, the sector can expect returns on equities (ROE) to rise above 10% in the next financial year (FY2023).
Maybank Investment Bank (Maybank IB), which maintained its positive outlook for the sector, pointed out that any increase in interest rates would be positive for banks’ earnings.
It said the current Malaysian Government Securities (MGS) yields already seem to reflect future increases in the interest rates.
“We also believe that banks have sufficient provisions to act as a buffer against potential asset quality issues arising from higher borrowing costs,” Maybank IB said in a research note today.
It expects Bank Negara Malaysia (BNM) to raise the domestic overnight policy rate (OPR) by 50 basis points (bps) in the second half of 2022 (H2 2022), taking the total rate hike to 75bps in 2022, with a further 50 bps increase in 2023.
It noted that with the 75bps rise in the US federal funds rate (FFR) to 1.5%-1.75% on June 15, the differential between Malaysia’s overnight policy rate (OPR) and the FFR has narrowed to just 25bps.
This is a huge drop from the 300bps recorded in 2014 and 2015.
Malaysia’s OPR now stands at 2%.
The Fed’s latest “dot plot” signals another 175bps hike over the remaining four Federal Open Market Committee meetings this year, with expectations that the current rate hike cycle will end in early 2023 at 3.75%, which implies a total of 200bps rate hikes between now and early 2023, Maybank IB said.
“With this latest aggressive Fed move, we now expect BNM to raise the domestic OPR by another 25bps at the next Monetary Policy Committee meeting on July 5-6, with the prospect of another 25bps hike by end-2022,” it said.
“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 this year, and we project a further 50bps OPR hike in 2023, bringing it to 3%,” Maybank IB said.
It noted that rate hikes generally have a positive short-term impact on 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 through the year, coupled with the eventual upward adjustment to funding costs, Maybank IB does not expect the NIMs to increase in full to reflect the expected 75bps rate hike this year and 50bps in 2023.
“On average, this is expected to result in a 1% to 3% increase in earnings this year and 2% to 5% earnings increase in 2023.
“ROEs are expected to expand by 0.2 percentage points in the financial year 2022 (FY22) and 0.3 percentage points in FY23. Most banks should see ROEs of more than 10% in FY23 as a result of the expansion in NIM,” it added.