KUCHING: A possible hike in the Overnight Policy Rate (OPR) will provide short-term benefits for banks as lending rates can re-price immediately, but competition will continue to pressure net interest margin (NIM).
“An interest hike will be positive for most banks as the variable rate and base lending rates-based loans tend to be re-priced within a week of a hike, while deposit rates take longer to adjust, due to various maturity profiles,” said analysts at AllianceDBS Research Sdn Bhd (AllianceDBS Research) added in a note yesterday.
The research firm anticipates Bank Negara Malaysia to raise the OPR by 25 basis points (bps) to 3.25 per cent at its upcoming Monetary Policy Committee meeting on Thursday.
The last time Bank Negara raised the OPR was in May 2011, AllianceDBS Research said.
When Bank Negara raised the OPR by a total of 75 bps (25 bps over three rounds) in 2010, there was an uptick in NIM but the expansion was short lived.
“Although Bank Negara kept the policy rate unchanged thereafter, NIM slipped due to persistent competition for deposits and loans.
“In our view, NIM compression will continue to persist in 2014 but we expect that to ease from a year ago with more rational pricing ahead.”
Customer affordability and ability to service higher interest costs need to be monitored when interest rates rise, the firm added, as this could lead to higher non-performing loans (NPL) and provisions in the books.
The OPR hike in 2010 was substantial (a total of 75 bps in one year) and triggered an uptick in NPL, and provisions or credit costs rose in tandem.
A larger hike could create risks of higher NPL and provisions. Nevertheless, AllianceDBS Research said the banking system’s loan loss coverage ratio remains robust at close to 100 per cent and should buffer an NPL uptick.
As economic conditions in the external environment are improving and inflation is expected to remain high, a tighter monetary policy will be on the cards.
The research house further added that banks are expected to benefit following an interest rate hike, provided there is no uptick in asset quality.
“Based on our sensitivity analysis, every 10bps hike in net interest margin (NIM) would raise sector earnings by circa six per cent.
“In general, banks with a larger share of variable rate loans and strong current account savings