One person who has made such an assumption, erroneously or otherwise, is former finance minister Lim Guan Eng.
Shortly after Bank Negara Malaysia (BNM) raised the OPR by 25 basis points (bps) to 3%, Lim said the policy “benefited no one except the banks”.
He pointed out that the central bank went ahead to raise interest rates despite the fact that headline inflation dropped to 3.4% and core inflation was down to 3.8%, a 34-month low, in March.
“Have the banks not earned enough?” he asked.
Indeed, all banks reported stronger net profits for the first quarter of the year (Q1 2023), with most also seeing higher earnings year-on-year (y-o-y) and quarter-on-quarter (q-o-q).
However, according to banking analysts FMT Business spoke to, there are other factors at play, too.
How do banks make a profit?
Banks make money out of charging borrowers a higher interest but paying depositors interest at a lower rate.
But that is not the only source of income for banks. They also have what is known as non-interest income. These are charges for services rendered such as fund transfer.
When the OPR rises, banks usually raise their lending rates immediately, but keep the deposit rates at the same level, thus widening their profit margin.
But this is only for the short term. They eventually have to raise deposit rates, such as fixed deposit or savings interest rates, to remain competitive. How soon that happens depends on the bank and how big a difference it makes for their bottomline is still up for debate.
Imran Yusof, head of research at MIDF Amanah Investment Bank Bhd, does not think that a higher OPR will have a long-lasting impact on banks’ profits.
“It will last perhaps one or two quarters,” he told FMT Business.
“Other factors (that also have an impact on banks’ revenues and profits) include market conditions, the economy, consumer sentiment, underwriting standards and competition,” Imran added.
In fact, quarterly net profits for all the country’s commercial banks, apart from CIMB Bank, had stayed at an even keel from the first quarter of 2019 (Q1 2019) when the interest rate was 3.25% across the few quarters when it was at a low of 1.75% until Q1 2023 when it returned to the 3% level.
Even when the OPR was languishing at 1.75% from Q3 2020 to Q2 2022, net profits did not drop significantly from the 2019 level.
There were a few exceptions, such as the huge net loss in Q1 2021 for AmBank Bhd but that was attributed to a one-off RM4.6 billion provision.
In the same quarter, CIMB Bank saw its net profit soar to nearly RM2.5 billion but that was thanks to a one-off revaluation gain of RM1.16 billion.
In a nutshell, changes in the OPR have little impact on profits.
Steady performance expected
Even so, the banking sector remains a favourite among analysts. By and large, they are still optimistic about the sector, with many research houses giving it an “overweight” call.
Kenanga Investment Bank analyst Clement Chua said local macroeconomics remain favourable, elevating household income and economic output as seen in the first quarter of 2023 when the gross domestic product (GDP) grew 5.6%.
On the other hand, with headline inflation still at a “troublesome 3.3%” rate, the net benefit from the GDP growth could be muted, he said.
“We also take cognisance of the depressed state of banking stocks amidst the recent fall of several high-profile foreign financial institutions,” Chua told FMT Business.
To investors, he recommends banks that offer greater safety nets compared with their peers and avoid institutions with a higher dependence on non-interest income such as Public Bank Bhd and RHB Bank Bhd.
The research unit at Hong Leong Investment Bank sees an opportunity to pick up banking stocks on weakness in the wake of the recent market slump driven by irrational fear-driven selling.
“(But) fundamentally speaking, nothing has drastically deteriorated. The headwinds were broadly baked into forward expectations,” it added.