Latest news with #RM19bil
The Star
14-07-2025
- Business
- The Star
Banks poised for stable margins in second quarter
PETALING JAYA: Net interest margins (NIM) of local banks are likely to remain stable in the second quarter of 2025 (2Q25), with a slight increase expected, as they benefit from improved liquidity following Bank Negara's recent reduction of the statutory reserve requirement (SRR) from 2% to 1% effective May 16. Building on this, analysts estimate that the SRR cut has released about RM19bil in liquidity into the banking system. CGSI Research said banks could have benefitted from additional interest income earned from the funds released, potentially lifting banks' net interest income (NII) growth. 'With this, banks' NIM could be stable quarter-on-quarter (q-o-q) in 2Q25 with an upward bias. As a preview of 2Q25 financial results, we expect core net profit of banks under our coverage to come in at between RM9.2bil and RM9.3bil, slightly below the RM9.37bil recorded in 1Q25,' CGSI Research said in a report. The research firm said it was not overly concerned about the potential q-o-q upturn in loan loss provisioning (LLP) in 2Q25, as the credit charge-off rate is likely to remain low at about 15 basis points, which is below the pre-Covid-19 level of 25 basis points. As for loans, growth is expected to come in at 5% year-on-year (y-o-y) by end-June 2025, slightly lower than the 5.2% recorded at end-March. According to CGSI Research, loan growth in the banking sector showed a V-shaped pattern, easing to 5.1% y-o-y at end-April 2025 before recovering to 5.3% by end-May. This was driven by fluctuations in business loan growth, which slowed from 4.8% y-o-y in March to 4.6% in April, then picked up to 5% in May. In contrast, household loan growth remained steady at around 5.9% throughout the three months. Meanwhile, the research firm expects the gross impaired loan ratio to be around 1.45% at end-June 2025, roughly in line with 1.42% at end-March. Going back to 1Q25, CGSI Research said three banks, namely, Hong Leong Bank Bhd (HLB), Affin Bank Bhd and Alliance Bank Malaysia Bhd , had recorded double-digit y-o-y core net profit growth, which was primarily driven by lower LLP. Noteworthy too was that Malayan Banking Bhd delivered a record-high core net profit of RM2.59bil in 1Q25, thanks to a 17.9% drop in LLP. HLB's core net profit of RM1.35bil in 1Q25 was also an all-time high, but this was lifted by a RM399mil write-back in management overlay, said the research firm. Ongoing write-backs of management overlays by banks are the potential re-rating catalyst for the sector. This, along with expectations of higher dividend payout ratios by most banks, supports CGSI Research's 'overweight' rating on bank stocks.
The Star
02-07-2025
- Business
- The Star
Bonded to interest rates
PETALING JAYA: The strong demand for ringgit-denominated bonds among foreign investors who have shifted their portfolio to minimise risks from US president Donald Trump's policies will depend on the trajectory of central bank monetary policy going forward, say bond specialists. Experts said that if the US Federal Reserve (Fed) decides to maintain the benchmark US interest rate while Bank Negara cuts the overnight policy rate (OPR) to support the domestic economy leading to widening yield differentials between US and Malaysian government securities (MGS), then investors chasing yields could shift their focus back to US treasuries (UST). Bond yields represent the rate of return an investor receives on a bond upon its maturity. The Fed maintained the benchmark interest rate at the 4.25% to 4.5% range in the May meeting as the US central bank sees the economy growing at a modest pace, with inflation slightly above its 2% target. Bank Negara has also held the OPR steady at 3% in its recent meeting, but reduced the statutory reserve requirement (SRR) to 1% from 2% that resulted in the release of an additional RM19bil in liquidity into the banking system to support the economy. However, despite the SRR decision, experts said there was still a high risk for an OPR cut in the second half of the year. In comparison, the bond yield spread between the 10-year UST and the 10-year MGS stood at 0.84% on June 5, 2025, based on the Bond Pricing Agency Malaysia's (BPAM) data. The 10-year UST on that date was at 4.40% and the 10-year MGS was at 3.56%. BPAM chief executive officer Meor Amri Meor Ayob told StarBiz several challenges could weigh on the ringgit bond market in 2025, with US monetary policy being one of them. 'UST continues to offer relatively higher yields compared to MGS, which may limit the appeal of MGS going forward. 'Moreover, with growing expectations that Bank Negara may cut the OPR in the second half of the year, yield differentials could widen further, potentially dampening foreign appetite for ringgit-denominated bonds. 'If the Fed maintains the current interest rates while Bank Negara cuts its OPR, the widening yield between the UST and MGS differential could reduce the attractiveness of Malaysian bonds to foreign investors and put pressure on the local ringgit,' he added. Meor Amri said another challenge lies in geopolitical uncertainties, especially around US trade policies under President Trump's administration, which could trigger market volatility and risk-off sentiment. He said the recent surge in foreign demand for ringgit bonds in March and April 2025 was driven by uncertainty surrounding President Trump's flip-flopping tariff policies and his proposed 'One Big Beautiful Bill'. These developments have prompted some bond investors to reduce their exposure to UST and seek diversification in emerging market assets such as MGS, he noted. Foreign net buying of Malaysian bonds surged to RM10.2bil in April this year compared to RM3.2bil in March, marking the second consecutive month of net inflows, despite 'Liberation Day' tariffs announced on April 2, 2025. The increase was primarily driven by strong demand for MGS and government investment issues (GII), which attracted RM9.7bil of inflows (March inflow: RM3bil), as well as the shorter-term Malaysian Treasury Bills (MTB) and Malaysian Islamic Treasury Bills (MITB). OCBC Bank (M) Bhd head of global markets Stantley Tan said the future demand from foreign investors for ringgit-denominated bonds would largely depend on a variety of macroeconomic and domestic factors. Since the onset of 2025, he said global economic uncertainties have escalated, primarily due to rising geopolitical risks and inconsistencies in US tariff policies. He said the imposition of substantial trade tariffs by the United States on its trading partners has disrupted global trade flows and increased the risk of a recession, particularly within the United States. As trade negotiations continue, investors have also rebalanced their portfolios, reallocating investments towards emerging markets and economies less impacted by the tariff conflicts. 'On the domestic front, Bank Negara has reiterated its confidence in the resilience of Malaysia's economy, which is fundamentally supported by robust domestic demand. 'However, the tone of the monetary policy committee (MPC) statement has shifted from cautious optimism to a neutral-dovish stance, reflecting the heightened external risks. 'In its latest meeting, the MPC reduced the SRR by 1% to provide additional liquidity support to the economy,' Tan said. He said the ringgit bond market has started to price in the possibility of a policy rate cut in the coming months following the central bank's slightly dovish tone. However, he said the risks to the current bond valuations remain, particularly if the economy proves resilient, prompting Bank Negara to hold policy rate steady, which could lead to a repricing of the bond market. 'A significant fiscal improvement by the government could mitigate the risk of a sell-off by easing the supply of MGS and GII in future issuances. Additionally, external risks may arise from the potential resolution of the US fiscal situation, which is currently under intense scrutiny by global investors. Should the US fiscal outlook improves, there is a possibility that investors may shift back to safe-haven assets, resulting in potential outflows from emerging markets including Malaysia,' Tan noted. RAM Rating Services Bhd economist Nadia Mazlan said foreign investor appetite for Malaysian bonds may continue to be under pressure in 2025 amid continued heightened uncertainties arising from US protectionist trade policies. She said the 'risk-off' sentiments among investors at the start of the year and at the onset of the 'Liberation Day' tariffs have already triggered a sell-off across both the equity and bond markets, including in Malaysia. Nadia said while there was some temporary reprieve from the postponement of higher reciprocal tariffs and signs of easing US-China trade tensions, which contributed to the net inflows in March and April, the continued unpredictability of US policies may still haunt global investors. 'The continued easing of market volatility recently may help support investor appetite for risker emerging market bonds in the short term, but it may be capped by the still-elevated uncertainties, especially as the 90-day pause on higher reciprocal tariffs is nearing its end. 'The potential future volatility from other proposed tariffs will likely leave foreign investors teetering on the edge,' she said. However, she said a tapering yield differential between the UST and MGS may help buoy some foreign demand for domestic bonds this year. 'With the Fed widely expected to reduce the federal funds rate in the face of slower economic growth, Bank Negara is expected to keep its OPR at 3%. This could help compress the UST-MGS yield spread, which should increase the appeal of Malaysian bonds and strengthen the ringgit this year. 'The country's strong economic fundamentals and prudent fiscal discipline also play important roles in making the country an attractive investment destination. 'Therefore, maintaining stable and effective domestic policies is essential to strengthening foreign investor confidence while ongoing improvements in fiscal metrics could further support demand for Malaysian bonds,' Nadia added.
The Star
05-06-2025
- Business
- The Star
Local banks positioning for potential OPR cut
HLIB Research noted that fixed deposit competition appeared benign with no significant board rate hikes observed. PETALING JAYA: Local banks are positioning for a potential overnight policy rate (OPR) cut in the second half of the year by paring back deposit rates and recalibrating fixed deposit (FD) strategies. In April, total deposits grew 3.8% year-on-year (y-o-y) and 0.2% month-on-month (m-o-m), supported by current account savings account (CASA) growth of 4.5% and FD growth of 2.5%. The CASA ratio held relatively stable at 28.5%, slightly lower than 28.6% in March 2025 but up from 28.4% a year ago. Meanwhile, the industry's loan-to-deposit ratio (LDR) eased to 87.4%, from 87.6% in the previous month and 86.3% in April 2024. Hong Leong Investment Bank (HLIB) Research noted that fixed deposit competition appeared benign with no significant board rate hikes observed. However, it flagged some cuts of between five and 15 basis points (bps) in promotional and conventional deposit rates across May. 'This is seen as a proactive step taken by banks to manage net interest margin (NIM) in view of the potential OPR cut, and possibly as a sign of easing competition,' it noted in a report yesterday. Similarly, Kenanga Research highlighted that most banks anticipate one OPR cut in 2H25, prompting 'more concerted efforts to drive shorter-term fixed deposit products.' It pointed out that fixed deposits with a tenure of fewer than six months made up 52% of total deposits in April 2025, compared with 51% in March 2025, while deposits with tenures of more than one year declined from 3% to 2%. 'This may likely persist as banks seek to further rationalise their funding cost amid the decline in asset yields,' it said. 'However, as the recent reduction in statutory reserve requirement (SRR) looks to provide some relief to funding cost (up to two bps improvement to NIMs), we believe banks can afford to not overly raise deposit rates to accumulate capital in the near term.' Last month, Bank Negara kept the OPR at 3% but lowered the SRR ratio by 100 bps to 1%, effective May 16 – the first SRR reduction since March 2020, at the start of the Covid-19 pandemic. CGS International (CGSI) Research pointed out that over the first four months of 2025, deposits increased by RM30.8bil, outpacing loan growth of RM23.2bil, 'reflecting improvements in the liquidity of the banking industry, in our view.' 'We believe the cut in the SRR by Bank Negara would release about RM19bil into the banking system, and would further enhance banks' liquidity,' the research house added. Meanwhile, in April 2025, total loans grew by 5.1% y-o-y and 1.0% year-to-date, a marginal slowdown from 5.2% y-o-y in March. The moderation was mainly attibuted to the slightly softer business loan growth, which eased to 4.6% y-o-y versus 4.8% in March. On the other hand, household loans held firm at 6% y-o-y for a second straight month. The industry's gross impaired loans ratio inched up to 1.43% in April from 1.42% in March, but improved from 1.63% a year ago, while loan loss coverage held relatively steady at 91%. CGSI Research viewed the slowdown in loan growth as 'not overly concerning,' noting that the expansion remains within its 2025 loan growth forecast of between 4.5% and 5.5%.
The Star
19-05-2025
- Business
- The Star
Local banks remain steady amid US tariffs and geopolitical risks
PETALING JAYA: The Malaysian banking system is not out of the woods yet, as it continues to face headwinds despite the injection of around RM19bil from the recent 'aggressive' cut in the statutory reserve requirement (SRR) ratio. On May 8, Bank Negara announced that the SRR would be reduced from 2% to 1%, effective May 16. This would release about RM19bil into the banking system amid heightened volatility and uncertainty in global financial markets. However, the central bank left the overnight policy rate (OPR) unchanged at 3%. Economists and analysts noted that while the banking system remains well-capitalised, it still faces risks from US tariffs and geopolitical tensions, despite temporary relief from a 90-day agreement between the United States and China to reduce steep tariffs Most agree that the outcome after the 90 days will be crucial in determining the broader economic impact, which, in turn, will have some effect on the banking sector. The anticipated slowdown in economic growth this year – driven by tariffs and escalating geopolitical risks – could potentially trigger a trade war, dampening global growth and leading to lower interest rates. Lower interest rates are expected to compress banks' net interest margins (NIMs), a key measure of profitability. Currently, the benchmark lending rate, or OPR, stands at 3%, with some economists forecasting at least one rate cut this year. Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid noted that a lower interest rate environment could make a comeback amid heightened global uncertainty from tariff shocks. 'If that happens, it would have an impact on banks' NIM, especially those banks that have a bigger share in variable-rate financing (loan) contracts.' He said weaker gross domestic product (GDP) growth prospects means banks may need to have higher financing loan loss provisions that could affect their earnings in the current year. Tighter credit underwriting standards would also impact loan growth, which could affect NIMs and profitability. 'Intense competition is here to stay. It's a challenging outlook for banks on the whole this year,' he noted. Mohd Afzanizam expects loan growth to reach around 5% for the year. That said, he believes banks' financial positions are still robust and should be able to withstand tariff-related shocks. 'I think the foreign investors are fully aware of this and they would be more than happy to have greater exposure to banking stocks as they are proxy to Malaysia's economic health,' Mohd Afzanizam said. UCSI University Malaysia associate professor of finance and Centre for Market Educationresearch fellow Liew Chee Yoong UCSI University Malaysia associate professor of finance and Centre for Market Education research fellow Liew Chee Yoong also expects NIM to face continued compression pressures in 2025. He noted that the confluence of rising deposit competition, stagnant interest rates, and limited room for further loan repricing may weigh on NIM levels across the banking sector. Banks experienced mild margin erosion in 2024, and this trend is expected to persist unless the lending mix shifts decisively toward higher-yield segments such as unsecured personal financing or small and medium enterprise loans, he said. As banks continue to digitalise and adopt new financial technologies, he said their ability to grow non-interest income may offer partial insulation against NIM pressures. 'While margin performance may not dramatically deteriorate, banks will have to work harder to preserve profitability, particularly in an environment where monetary conditions are largely neutral and market yields are plateauing. 'Hence, the NIM outlook for 2025 leans toward a marginal decline or, at best, flat performance compared to 2024,' he said. 'Should inflation remain sticky or unemployment rise, banks may experience a deterioration in asset quality, particularly in unsecured consumer loans. 'Hence, while resilient, the sector must remain vigilant and agile in managing credit risks and regulatory burdens,' he said. RAM Rating Services Bhd senior vice president of financial institution ratings Wong Yin Ching Meanwhile, RAM Rating Services Bhd senior vice-president of financial institution ratings Wong Yin Ching said banks' profits may face pressure in 2025 in line with more moderate loan growth and increased provisions. NIMs are envisaged to stay largely unchanged, with the lower SRR having a mild positive impact. 'NIMs will be predominantly influenced by the direction of the OPR. At this juncture, RAM expects the OPR to remain stable for the rest of the year unless economic growth slows significantly, which is not our base case,' she said. RAM expects slower GDP growth of 3.5% to 4.5% in 2025, down from 5.1% last year. Despite the SRR reduction, she said the rating agency is maintaining its loan growth projection of 4% to 4.5% for the banking sector, citing ongoing trade negotiations as a key uncertainty. 'Consumer loans, particularly home loans, will drive domestic loan expansion, given weaker sentiment and increased caution by businesses. 'Calls for potential deferment of the targeted petrol subsidy rationalisation and revision of the sales and service tax rates and scope, may further support consumer spending,' Wong said.
The Star
13-05-2025
- Business
- The Star
Bank Negara's low SRR benefits banks
PETALING JAYA: Bank Negara has cut the statutory reserve requirement (SRR) ratio to an 'unnaturally low figure', heavily implying that the overnight policy rate (OPR) could be reduced later. However, until the OPR is actually reduced, analyst Samuel Woo of MIDF Research said the lower SRR will bode well for banks' net interest margin (NIM) outlook, alleviating cost of fund-related concerns. 'At the very least, banks now have more cash for investment purposes,' said Woo in a note. A cut to the OPR, down from 3% currently, will offset the upsides to NIM, he added. 'Whether or not this is enough to jumpstart loan growth remains to be seen. '1% is an unnaturally low figure for the SRR rate to be at. Hence, we are expecting this figure to revert to a higher range once signs of economic improvement start to show,' stated Woo. On May 8, Bank Negara announced that the SRR will be reduced by 100 basis points from 2% to 1%, effective May 16. This will release about RM19bil into the banking system, at a time of heightened volatility and uncertainty in global financial markets. The central bank's announcement came on the same day the Monetary Policy Committee decided to keep the OPR unchanged at 3%. TA Research analyst Wong Li Hsia called the SRR reduction as 'broadly positive' for the banking sector, providing banks with additional balance sheet capacity to grow loans and better manage funding costs. This could support higher NIM, especially for banks with a stronger focus on net interest income (NII). 'That said, we note that the system's average loan rate has slipped to 4.97% in March 2025 from 5% a month earlier and 5.37% in March 2024. 'Our estimates suggest that the improved liquidity conditions could lift overall banking sector earnings by around 1.9%.' While the additional liquidity is expected to support credit growth, Wong said banks may also choose to allocate a portion of the freed-up reserves into other income-generating assets, particularly government securities and corporate bonds, thus providing an alternative income stream, especially if loan demand remains subdued in the near term. TA Research made no change to its earnings estimates for now, pending guidance from the banks. 'We also maintain the 2025 loan growth forecast at 6.2% for now, underpinned by consumer and business loan growth of 6.7% and 5.5%, with consumer loans remaining a key driver,' according to Wong. Rakuten Trade described Bank Negara's decision to cut the SRR to 1% as 'aggressive'. However, it believes that the move will spur market confidence. 'However, we hope the banks will also play their part to be less stringent in loan approvals. We view Bank Negara's latest move may encourage some buying interest in the banks.' Meanwhile, Hong Leong Investment Bank (HLIB) Research said the SRR reduction came as a surprise, given the seemingly comfortable liquidity position of the banking sector. On an aggregated basis, there are minimal signs of liquidity stresses in the banking system, with the latest March 2025 liquidity coverage ratio or LCR at a healthy 152%. The system loan-to-deposit ratio or LDR stands at 87.6%, still below the five-year peak of 89.7%. Deposits continue to grow at a steady 3% year-on-year, and fixed deposit competition remains subdued, with no major price wars. Credit demand also remains robust, with loan applications up 5.9% year-to-date. These, collectively suggest no immediate, system-wide liquidity distress. Similarly, the gradual decrease in the three-month Kuala Lumpur Interbank Offered Rate since early 2025 signals interbank liquidity. HLIB Research believes that the SRR move, while seemingly accommodative, is primarily aimed at preserving Malaysia's financial market competitiveness amid regional easing trends. 'By utilising an SRR cut instead of an OPR reduction, Bank Negara strategically avoids direct pressure on the ringgit and the associated risk of imported inflation. 'Positive for banks. Based on our calculations, the additional liquidity could boost bank net profits by 1%-3%, providing a buffer against a potential rate cut. 'Our house view remains that a 25-basis-point OPR cut is likely in the second half of 2025,' according to the research house.
