Bank Negara Malaysia (BNM) took a predicted step in the right direction as economists across the board correctly guessed for the Monetary Policy Commitee (MPC) meeting to increase the Overnight Policy Rate (OPR) by 25 basis points to 3.25 per cent.
The floor and ceiling rates of the corridor for the OPR are correspondingly raised to three and 3.50 per cent respectively.
BNM’s decision to hike OPR to 3.25 per cent was within Bloomberg consensus – the first time since July 2014.
According to BNM’s Monetary Policy Statement on January 25, the global economy has strengthened further, with growth becoming more entrenched and synchronised across regions.
“Global trade continues to sustain strong growth performance. In the advanced economies, diminishing labour market slack and additional policy support will provide further impetus to growth.
Source: RHB Research
“In Asia, growth is driven by sustained domestic activity and strong external demand. Globally, financial markets have remained stable. Global growth is projected to experience a faster expansion in 2018.”
In this environment, BNM said risks to the global growth outlook are more balanced, pointing towards continuity in the current phase of global economic expansion.
“For the Malaysian economy, latest indicators reaffirm the strength in exports and domestic activity. Looking ahead, the strong growth momentum is expected to continue in 2018, sustained by the stronger global growth and positive spillovers from the external sector to the domestic economy.
“Domestic demand will remain the key driver of growth, underpinned by favourable income and labour market conditions.”
The central bank went on to paint a rosy picture of the outlook for investment activity, driven by new and on-going infrastructure projects and capital spending by both export- and domestic-oriented firms.
‘Likely pause in future hikes’
On this move, RHB Research Institute Sdn Bhd (RHB Research) said the normalisation of policy came in earlier than expected.
“Looking forward, we believe the central bank would likely pause in its tightening after the hike, and maintain rates at 3.25 per cent for the whole of 2018,” it forwarded.
“Additionally, the MPC stated that it will continue to assess the balance of risks surrounding the outlook for domestic growth and inflation, suggesting that further hikes would likely be data dependent.
“With the ringgit appreciating by four per cent year to date, it also represents a form of monetary tightening. As such, we believe the risk of further rate hikes are contained, for now.”
AllianceDBS Research Sdn Bhd noted that generally, an OPR hike will directly increase the Base Financing Rate (BFR) by as much as 25bps and deposit rates by as much as around 20bps.
“For the banking industry, the rate hike means higher margin from variable rate products,” said economist Manokaran Mottain in a report. “We believe the decision was largely due to high inflation rates, which had been eroding deposit rates.
“Real interest rates have been negative over the last 12 months. The decision by BNM is considered a tough one, partly due to high inflation rates. With a strong growth momentum, low interest rates are feared to result in financial imbalances.”
Positive factor includes the strengthening of the ringgit in the short-term. As of 24 January 2018, the ringgit has rallied to RM3.92 per US dollar, registering a 2.5 per cent gain since the start of the year.
Lastly, foreign investors were buying-back MGS amounting to RM14.8 billion in 2H17, after selling-off in the first half of the year. Moving forward, foreign buying of MGS will likely continue, given that around RM26.0 billion of MGS is set to mature in 1H18.
In the meantime, the rise in OPR will likely improve Malaysia’s attractiveness amongst foreign investors, leading to stronger capital inflows and further appreciation of ringgit.
Overall, we do not see this to be the start of a monetary tightening process. In other words, we do not expect any more hikes for the next 12 months, at least.
Affin Hwang Investment Bank Bhd (AffinHwang Capital) is one of the parties believing BNM will likely maintain its policy rate at 3.25 per cent in 1H18.
“BNM will likely wait until 2H18 to gauge the state of the Malaysian economy, before deciding on whether to raise OPR further by 25bps to 3.5 per cent, especially when the government is targeting domestic demand growth to sustain the country’s real GDP growth.
“We believe the strengthening ringgit may begin to raise some concerns among domestic manufacturers over export competitiveness.
“Following the announcement of forex measures, where BNM requires 75 per cent of export proceeds to be converted into ringgit, the country’s net conversion for the period July to November 2017 rose by US$7.7 billion, supporting the ringgit.
“Similarly, the amount of its swap positions by BNM has narrowed and improved from a high of US$19.1 billion in April 2017 to US$11.1 billion in November 2017, reflecting improving macro fundamentals and rising demand for the ringgit.”
Several banks in Malaysia have raised their base rates and base lending rates.
Malayan Banking Bhd (Maybank) revised its base rate (BR) from 3 per cent per annum to 3.25 per cent, and its base lending rate (BLR) to 6.9 per cent per annum from 6.65 per cent per annum, effective January 29.
Meanwhile, it also raised its Islamic base rate by 25bps from 3 per cent per annum to 3.25 per cent, while the Islamic base financing rate (BFR) was increased from 6.65 per cent per annum to 6.9 per cent.Fixed deposit rates were also revised upwards by between 20bps to 25bps.
Subsidiaries of CIMB Group Holdings Bhd, CIMB Bank Bhd and CIMB Islamic Bank Bhd, will also raised their BLR and fixed deposit rates by 0.25 per cent effective February 2 onwards. Its loans and financing, based respectively on BLR and BFR, will be increased by 0.25 per cent.
Hong Leong Bank Bhd and Hong Leong Islamic Bank Bhd hiked their BR, Islamic BR, fixed deposit rates and fixed deposit-i rate by 0.25 per cent, as of Jan 30. Loans and financing based on the BLR and Islamic financing rate were also increased respectively by 0.25 per cent.
OCBC Bank (Malaysia) Bhd and its subsidiary OCBC Al-Amin Bank Bhd will increase their base rate (BR), base lending rate (BLR) and base financing rate (BFR) by 0.25 per cent effective February 2, 2018. Similarly, all of OCBC’s fixed deposit (FD) board rates will also increase by 0.25 per cent the same day.
Bank Islam Malaysia Bhd raised its BR as of Jan 30 from 3.65 per cent to 3.9 per cent, while its BFR has been increased from 6.85 per cent to 6.6 per cent effective immediately.
Bank Muamalat Malaysia Bhd increased its base rate to 3.95 per cent per annum and base financing rate to 6.95 per cent per annum, effective Feb 2, 2018. The bank’s fixed term deposit board rates also increased up to 25 basis points.
Bank Rakyat has also raised its base rate and base financing rate by 0.25 per cent from February 6. The BR and BFR will be increased to 4.1 per cent and 7.08 per cent respectively.
Alliance Bank Malaysia Bhd, together with its subsidiaries, Alliance Investment Bank Bhd and Alliance Islamic Bank Bhd, will raise its base rate from to 4.07 per cent, and its base lending rate and base financing rate BFR to 6.92 per cent.
Standard Chartered Malaysia and its Islamic subsidiary Standard Chartered Saadiq raised their base rate to 3.77 per cent, while their base lensding rate and base financing rate were revised to 6.95 per cent. The change took effect from Feb 5. They also raised their fixed deposit rates by between 20bps and 25bps, on the same day.
RHB Banking Group – which covers RHB Bank Bhd, RHB Islamic Bank Bhd and RHB Investment Bank Bhd – will raise its BR to 3.90 per cent per annum, and will also revise the BLR to 6.85 per cent per annum. RHB’s fixed deposit rates will also be revised upwards by 20 basis points effective Feb 2, 2018.
Short term boost for banks
Banks are the likeliest beneficiaries from the OPR hike. This sentiment was shared by Hong Leong Investment Bank Bhd (HLIB Research) who expected the latest move is positive to the sector’s earnings as banks will start to reprice loans and deposits immediately.
They said the timing gap between repricing of loans and deposits will result in uplift to net interest margins (NIMs) temporarily before it normalises back, due to competitions and repricing impact.
“We expect the 25bps hike in OPR will boost sector earnings by two or three per cent,” it said in a sector analysis, adding that banks are expected to to reprice variable rate loans almost immediately, hence banks with larger composition of variable loans should benefit to bottomline in a rising interest rates environment.
“Banks with larger proportion of current and savings accounts (CASA) should be able to better manage cost of funds as CASA is the low-cost funding sources.”
Although the repricing of fixed deposit will start immediately, HLIB Research said however the impact could only be felt after three to nine months given the maturity of the fixed deposits.
“The repricing of loans will drive higher monthly repayment for variable rate loans. Thus the issue of affordability to service loans will arise.
“However, we view that the 25bps increase is manageable and the likehood of higher NPL is minimal at this stage.”
Similarly, MIDF Research believe that the OPR hike will provide a short term boost to banks’ NIMs as there will be a near-immediate adjustment to loans and financing which has a floating rate.
“We note that previous OPR hike had translated into a corresponding increase in Base Lending Rate – or in this case, Base Rate – the following month.
“We expect that this will not only ease any NIM compression pressure but also lift margins in the near term especially from an interest income perspective.
“This will strengthen the improvement in NIM that we had observed in the first nine months of 2017 in the majority of the banks under our coverage from better cost funding management.
“However, we expect NIM to normalise within 2 to 3 quarters due to an increase to the deposits rates, particularly an adjustment to the fixed deposit rates which had been contracted before the OPR hike.”
Winners and losers from the hike
From the move, researchers at Public Investment Bank Bhd (PublicInvest Research) said the benefits of any hike will come from lending rates being priced at wider margins as compared to deposit rates.
In the previous rate-hike cycle between 2010 and 2014, industry base rates were raised between 0.25 per cent and 0.27 per cent each time, close to the corresponding 0.25 per cent OPR hikes.
Average fixed deposit rates were only bumped up about 0.22 per cent during thiss period, it observed, marking a clear indication of the positive re-pricing gap.
“Just as importantly however, banks with a higher proportion of low-cost deposits, such as CASA, could amplify the positive impacts of a rate hike,” it added.
“Current accounts typically bear no interest – though increasingly less so these days, but still considerably lower than others – while rates for saving accounts are significantly lower than that of fixed deposits.”
Ii thus said beneficiaries of the hike will be ones with the highest proportion of variable-rate loans, with Alliance Bank standing out in this respect as it held 90.3 per cent as at September 2017.
“In a rate hike scenario, only interest rates of variable-rate loans are adjusted upwards. Incidentally, Alliance Bank also has one of the highest proportions of domestic low-cost deposits amongst its peers,” PublicInvest Research added.
“CIMB Bank and RHB Bank should also benefit given their respective 83.5 per cent and 82.5 per cent variable-based loan portfolios, though impact will be lesser in the former given its higher proportion of foreign loans which will not benefit from this OPR hike.
“Affin Bank is the least likely beneficiary as it has the largest proportion of fixed rate loans (36.9 per cent as at Sept 2017).”
Meanwhile, MIDF Research concurred that banks with higher floating rate loans will benefit the most.
“We opine that with a short term boost to NIM, earnings for banks will be positively affected. We estimate an average improvement of 1.5 per cent to the net profit of banks under our coverage when compared against our previous forecast.
“We expect banks with higher floating rate loans to benefit the most. As such, we believe that Alliance Bank Malaysia Bhd will be a major beneficiary as its floating rate loans comprised of 90.3 per cent of its loans book, the highest amongst its peers.
“Meanwhile, for the regional banks, Maybank and CIMB, the impact on earnings will be 0.8 per cent respectively. This is due to the fact that their loan exposures are more diversified, with domestic loans comprising of 58.1 per cent and 57 per cent respectively of its total loans book.”
One of the possible downside risks from the OPR hike will be a slowdown in loans growth, which MIDF Research said could come either from lower loans demand or from higher borrowers’ rejection rate.
“Based on our observation, loans applied and approved declined on sequential month basis by 1.5 per cent and 0.9 per cent respectively between June 2014 and July 2014, the last time there was an OPR hike.
“However, it subsequently bounced back to register 4.9 per cent month on month (m-o-m) and 4.3 per cent m-o-m the following month. We expect to see similar trend to occur between February and March this year.”
On a more pessimistic view, the team at Affin Hwang Investment Bank Bhd (AffinHwang Capital) opined that the rate hike is not expected to have significant impact on banks’ profits.
“In our view, the degree of normalisation in interest rates is not expected to result in a material impact on the banks’ bottomline, ranging from 0.7-3.5 per cent, as the initial repricing effect on variable rate loans will be gradually offset by repricing of the fixed deposits, which still make up a large chunk of most banks’ deposit base.
“Secondly, the degree of normalisation in interest rates is not expected to cause default rates to spike among borrowers (as the impact is expected to be benign while fundamentals in the economy remains strong on the back of a synchronised global growth).
It went on to outline Alliance, Maybank, RHB, Public Bank and Hong Leong Bank as ‘clear winners’ from this hike.
“The clear-cut winners – those with more asset-sensitive balance sheets — are Alliance Bank (which has 90 per cent variable rate loans in its portfolio; 35.3 per cent CASA ratio) and is entirely domestic-centric.
“RHB Bank (82.5 per cent variable rate loan portfolio; 27 per cent CASA ratio), Maybank (71 per cent variable rate loan portfolio; 35 per cent CASA ratio), Public Bank (76.9 per cent variable rate loan portfolio; 25.5 per cent CASA ratio) and Hong Leong Bank (76.5 per cent variable rate loan portfolio; 26.8 per cent CASA ratio) are also beneficiaries.
“Meanwhile, AMMB may see a neutral impact from the repricing in variable rate loans as it also has a high percentage of fixed deposits (at 79.2 per cent of its deposit base).
“On the other hand, CIMB which has a higher percentage of overseas loans (43 per cent of loan book) may not likely see a meaningful impact of the OPR hike on its 2018E net profit due to impact of NIM compression from its Indonesian unit.”
Better loans growth in 2018?
Regardless of this, PublicInvest Research continued to believe that loans pipeline will remain robust moving forward.
“We believe that loans pipeline will continue to be robust in 1HCY18. Main driver will be solid demand for borrowing and lending of mortgage loans despite the higher OPR and subsequent Base Rate.
“Our property analyst expect that there will be a negative impact to property demand in the short term but will subsequently normalise in 2 to 3 month time.”
However, AffinHwang Capital believe that loans growth will be below expectations in CY17 despite the strong domestic economic performance,
understanding that there may be a lag effect.
“With our economics team expecting continuing solid GDP performance this year and a healthy loans pipeline, we expect that loans growth will pick up in CY18.
“The loans applied and approval will provide a steady loans pipeline at least in 1QCY18. As such, we maintain our expectations of a loans growth of 6 per cent year on year for CY18.
“OPR to remain at 3.25 per cent in CY18. Our economics team’s baseline view is for one rate hike in CY18. The hike is seen as a step to normalise the degree of monetary accommodation rather than the beginning of tightening cycle. Hence, this would moderate any downward pressure on loans growth.
“With the expected boost to the earnings of banks under our coverage, we maintain our positive stance for the banking sector. We note that the share price performance of banking stocks this past week may indicate that investors have already factored in the OPR hike.
“Nevertheless, we believe that there is still upside given that we believe the main investment premised of the banking sector is not just based on the OPR hike but also on continuing loans growth.
“We believe that the continued domestic economic performance in CY18 and stable employment environment will drive loans growth.”
REITs: Fundamentals to outweigh impact from rate hike
For the real estate investment trust (REIT) segment, analysts believe fundamentals will outweigh any impact stemming from the OPR hike.
MIDF Research is one of the research firms not expecting the hike to impact adversely on REITs based on historical price movement.
“In fact, unit prices of five out of seven REITs advanced from then until end-2014,” it anaysed.
“We believe that investors placed more importance on the earnings outlook of the respective REITs rather than the slight impact from the higher interest rate.”
MIDF Research also affirmed its predictions of minimal impact on earnings per unit for REITs, which is limited from negative 0.2 per cent to negative 2.1 per cent.
“Among the REITs that we cover, Amanahraya REIT’s loans are all based on floating rates. Conversely, IGB REIT’s floating rate loans was only kept at one per cent,” it added.
It went on to nore that REIT managers are working on converting part of their floating rate loans to fixed rate loans to mitigate the risk of potentially higher interest costs in the event of more rate hikes.
“That said, our house economist expects only one rate hike this year,” it said.
“We remain neutral on the impact the rate hike has for REITs under our coverage. Although borrowing costs are expected to increase for REITs with high levels of floating rate loans, most of the REITs under our coverage see limited impact from the rate hike as 80 per cent or more of their debts are based on fixed rates.
“Even for Amanahraya REIT – which has 100 per cent of its loans based on floating rates – is expected to see earnings impact limited to minus 2.1 per cent.”
AffinHwang Capital concluded with this view, believing that impact to Malaysian REITs’ 2018 earnings per share is minimally negative.
“The impact of higher OPR to REITs’ 2018 earnings is, in our view, negative but minimal. Half of the REITs under our coverage – such as Kuala Lumpur Stapled Group, IGB REIT and Sunway REIT – have majority of their borrowings in fixed rate.
“Meanwhile the others such as AxisREIT, YTLREIT and Pavilion REIT have largely hedged their 2018 interest exposure. We have already factored in a 25bps OPR hike in our earnings forecasts.”
Moving forward, it said a further 25bps hike in OPR may weaken the REITs’ 2019 earnings per share by zero to two per cent. Kuala Lumpur Stapled Group and IGBREIT are least exposed while Sunway REIT and AxisREIT are more vulnerable to OPR hikes.
This came on the back of the OPR hike being within market expectations, as majority (80 per cent) of the economists surveyed by Bloomberg has predicted an OPR hike in January 2018.
“Hence, the impact to REITs share prices should be muted. Historically (2010-2017), there were little correlation between REITs’ share prices and OPR hike or cut.
“We reiterate our neutral rating on REITs. We expect the sector’s dividends per unit to grow by circa three per cent in 2018 – a recovery from zero-growth in 9M17, but well below historical averages.
“Weak consumer sentiment may continue to weigh on retail sales, while office rentals should stay suppressed due to oversupply.”
Auto: Hike not the start of tightening cycle
For automotive makers, the OPR hike did not signify the start of a tightening cycle.
In fact, the OPR hike was in line with opined MIDF Amanah Investment Bank Bhd’s (MIDF Research) view as industrial and trade activities across major and emerging economies remain on an upward trajectory.
“MIDF Economics’ baseline view is for one rate hike in 2018. Importantly, the hike is seen as a step to normalise the degree of monetary accommodation rather than the beginning of a tightening cycle,” it said in a sectoral.
This came as total industry volume (TIV) – a barometer gauging the auto industry’s health – saw its growth kept in check provided minimal OPR fluctuation.
“Historically, there has been inverted correlation between OPR changes and TIV movement – TIV growth tends to weaken or in circumstances where OPR is hiked sharply.
MIDF Research gave an example of October 2005 to May 2006 when the OPR was hiked from 2.75 per cent to 3.50 per cent. Within a period of just seven months, TIV shifted into contraction mode instead of just slow growth.
Provided such sharp rate hike trend does not occur this time around – underpinned by MIDF Economics’ view of just one rate hike in 2018, the research house said TIV should still register positive growth in 2018, especially after two consecutive year of contraction in 2016-17.
On the contrary, small or gradual changes in OPR as seen in later years (2013-2016) had little impact on TIV growth.
More importantly, MIDF Research’s 1.7 per cent year on year TIV growth forecast for 2018 already reflects a conservative TIV-GDP growth multiplier of 0.3 times versus a 15-year historical average of 0.5 times.
This is slightly more conservative than the Malaysian Automotive Institute’s and Malaysian Automotive Association’s forecasts of two per cent and 2.3 per cent growth respectively.
“Impact if any, hits national cars first. National car segment customers are most price sensitive and as such are likely to be at the forefront of any impact to industry volumes – which at this point we expect to be manageable.
“The majority of non-national models are priced beyond the RM75,000 price tag, and for Mazda specifically, more than half of sales are derived from the exceeding RM120,000 price segment, which typically consist of customers with reasonably good credit profiles.”
On the flip side, the strengthening of the ringgit following the OPR hike is a big positive for auto players under MIDF Research’s coverage, underpinning its bullish sector call.
“UMW Toyota has large exposure to US dollar given that all its imported CKD kits and CBUs are transacted in US dollar. Given low localisation rates (of between 20per cent-60 per cent) relative to the national makes (of 80 per cent-95 per cent), we estimate around half of total component costs are imported.
“Tan Chong is estimated to have circa 80 per cent (of total imported cost) exposure to US dollar imports with the rest in JPY.
“Every 1 per cent change in the USD impacts our FY18F by 4.7per cent for UMW (Group) and 64 per cent for Tan Chong. As Tan Chong’s earnings is close to break-even point, its bottomline is very sensitive to forex changes.”
Other pointers from BNM’s statement:
Headline inflation averaged at 3.7 per cent in 2017. Inflation is expected to average lower in 2018, on expectations of a smaller effect from global cost factors.
A stronger ringgit exchange rate compared to 2017 will mitigate import costs. Global energy and commodity prices are expected to trend higher in 2018.
However, the trajectory of headline inflation will be dependent on future global oil prices which remain highly uncertain. Underlying inflation, as measured by core inflation, remains moderate.
The domestic financial markets have been resilient. The ringgit has strengthened to better reflect the economic fundamentals.
Banking system liquidity remains sufficient with financial institutions continuing to operate with strong capital and liquidity buffers. The growth of financing to the private sector has been sustained and is supportive of economic activity.
With the economy firmly on a steady growth path, the MPC decided to normalise the degree of monetary accommodation.
At the same time, the MPC recognises the need to pre-emptively ensure that the stance of monetary policy is appropriate to prevent the build-up of risks that could arise from interest rates being too low for a prolonged period of time.
At the current level of the OPR, the stance of monetary policy remains accommodative. The MPC will continue to assess the balance of risks surrounding the outlook for domestic growth and inflation.