WHILE at least one interest rate hike can be expected in 2022, central banks may be coerced to prematurely raise interest rates more than once due to rising inflationary pressure.
Even though such increase bodes well for margins, an accelerated, successive interest rate hike would raise financing costs and suppress the much-needed cash flow buffers for households and businesses, according to TA Securities Research.
“Furthermore, prospects of a rising interest-rate environment, coupled with rising inflationary pressures, could subdue demand, leading to decrease investment and discouraging lending activities, as well as potentially raising impaired loans,” justified analyst Li Hsia Wong in a banking sector update.
To recap, Bank Negara Malaysia (BNM) first reduced the overnight policy rate (OPR) to 3% from 3.25% in May 2019 before subsequently lowering the OPR by 125 bps by July 2020.
“As the domestic growth prospects improve, we envisage BNM to raise the OPR by 25 bps in 2H 2022. While this is positive for NIM, we believe that banks will restart competition for loans and deposits on brightened macroeconomic prospects,” opined TA Securities Research.
Among the challenges envisaged by the research house moving forward include:
Fear of more movement restrictions: Although optimism has improved with economic activities expected to be on the mend, the underlying sentiment will still be subjected to volatilities amid ongoing macro challenges such as supply chain disruption and slower growth in China.
A case in point is that Health Minister Khairy Jamaludin has warned that the number of daily COVID-19 cases in Malaysia could rise to more than 30,000 by end-March if measures were not taken to control the spread of the Omicron variant.
Delay in the full re-opening of international borders: A prolonged border closure would further dampen selected economic sectors such as tourism which the pandemic has adversely impacted. Based on the latest BNM data, restaurants & hotels account for 1.1% of total loans in the system.
The amount of impaired loans from this segment ballooned in 2021 with restaurants & hotels accounting for around 3.3% of total impaired loans in the system, translating to a gross impaired loan ratio of approximately 4.5%.
Potential cliff effect: As the economy continues to return to normal, financial aids offered by the government and financial institutions should start to taper off. The Employees Provident Fund (EPF) has also reiterated its stance to not compromise on its members’ retirement future by supporting the discontinuation of any more withdrawals of EPF savings.
Withdrawal of all these relief measures could set the economic recovery back, thus cutting household incomes, increasing unemployment rates, and undermining consumer and investor confidence.
Slashing dividend to conserve capital: Due to concerns that the macro-outlook could deteriorate with the re-imposition of another nationwide lockdown should new COVID-19 infection spiral out of control and quickly fill hospital beds, banks would continue to exercise prudence to preserve capital.
Risks of rising loan loss provisions for banks will erode profitability and deplete capital, thus prompting banks to defer payment of interim dividends last year.
Despite the potential earnings risks, TA Securities Research reiterated its “overweight” stance on the Malaysian banking sector based on the belief that:
- The banking system remains resilient, supported by healthy liquidity and capital buffers to absorb potential losses and support lending activities;
- Proactive monitoring by the central bank;
- Continued repayment and debt rehabilitation assistance for targeted borrowers via AKPK (Credit Counselling and Debt Management Agency); and
- A conducive interest rate environment should help keep systemic asset quality in check.
“Given the recent increase in the banking stock’s share prices, we downgrade AMMB Holdings Bhd and Alliance Bank Malaysia Bhd from ‘hold’ to ‘sell’ as the total upside has fallen to <7%,” added TA Securities Research. – Jan 10, 2022
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