PETALING JAYA: While banks and financial institutions are attempting to up the ante in terms of making attractive deposit offers, analysts believe the financial sector is nearing the end of a deposit competition cycle.
Lenders that have presented inviting deposit packages in recent times include Al Rajhi Banking & Investment Corp (M) Bhd through its Rize app as well as Principal Asset Management Bhd.
Al Rajhi has an offer of 5% per annum for the first RM5,000 deposited and 4% for any amount thereafter, while Principal’s package pledged 4.88% for a placement of between RM500 and RM1,000 via the Touch n’ Go e-wallet.
The competitive rates, one market analysts said, are driving liquidity away from the local stock market which is down some 5% for the year.
The financial entities are taking advantage of the high interest rates environment on the back of four 25-basis point rate hikes by Bank Negara in 2022.
The theory on lending is that banks need deposits to be able to give loans to businesses and the public.
Rakuten head equity sales Vincent Lau is of the opinion that although there are financial institutions looking to solidify their deposit base by strengthening the current account savings account (CASA) and fixed deposit (FD) holdings, most lenders have moved past this stage.
“We think there is still ample liquidity in the banking system, and hence the reason why we are seeing some mid-sized and smaller banks still looking to improve their CASA.
“However, at the core of it, we expect Bank Negara to maintain the overnight policy rate (OPR) at 2.75% for the rest of the year,” he told StarBiz.
Acknowledging expectations for the central bank to pause its rate hikes is in contrast with consensus view – as many analysts and economists are anticipating another OPR rate hike 25 basis points for the year – Lau said Bank Negara is aware that rate hikes may not be an effective method to slow an already moderating inflationary scenario.
A persistent rise in rates may result in more gross impaired loans and increase the overall cost of obtaining funds.
A banking analyst from a local research house said the fight for deposits among lenders had begun at the end of last year and it had kept going until now.
The competition for CASA was primarily due to the widespread expectation for the central bank to continue to increase rates coming into this year, as banks were looking to lock in placements to secure their margins before more OPR hikes were announced.
At the same time, the return of Bank Negara’s statutory reserve requirement (SRR) of commercial banks – the current rate of 2% – may have also driven lenders to replenish liquidity.
An SRR is derived from the concept of fractional reserve banking, the system which is used globally in the financial world. Fractional reserve banking, as its name implies, requires only a fraction of a bank’s deposits to be held in cash or in a commercial bank’s deposit account at the central bank.
In the case of Malaysia, since the SRR is 2%, then the reciprocal multiplier is 50, meaning banks are able to lend out 50 times more than their reserves. By extending credit, commercial banks can create liquidity.
“Another reason for the heightened competition for deposits is because certain banks may only have obtained their full-fledged commercial banking licence in recent years and were keen to compete more aggressively for deposits, simply because they can now do so,” said the analyst.Elaborating on why the competitive environment for placements could be coming to an end, he said only a handful of financial entities are marketing new deposit promotions and most of them are short-term or for a low deposit sum.
“We are seeing some banks looking to soften their deposit rates, and this could signal less competition from the second quarter of 2023.
“Meanwhile, one adverse effect the contest for deposits could bring about for lenders is a compression of their net interest margins, especially for the first three months of this year.”
OCBC Bank (M) Bhd head of wealth management Reuben Tan concurred with both Lau and the banking analyst, stating that banks had been increasing their CASA rates since last year as the interest rate landscape in the country was higher today compared with the same period of 2022.
Banks tend to have a minimum deposit level for a new FD placement for various reasons including for strategic marketing purposes, according to Tan.
It may make sense to understand on a base level how and why banks search for deposits and provide loans.
When a bank extends a loan, two corresponding entries are made on its balance sheet – one on the assets side and another on the liabilities side.
The loan counts as an asset of the bank but it is, at the same time, offset by a newly created deposit, which is a liability of the bank to the depositor holder.
The lending practices of banks are not constrained by the SRR as they are by profitability, risk-reward considerations and how much of the deposits placed are insured by the government and the Malaysia Deposit Insurance Corp, according to an analyst.
Hence, lenders do not create loans from reserves or deposits, but they create a loan asset and deposit liability on their balance sheets.
The loan creates the deposit, of which reserves need to be held against, provided by the central bank.
A bank does a credit check on an individual or institution before it provides a loan and such checks could involve examining a person’s credit history, current liabilities, assets and income.
The move is to ensure that the money ;paned could be repaid, according to an analyst.
Meanwhile, a cursory search on RinggitPlus showed that Bank Simpanan Nasional had the best one-year FD placement at 3.1% per annum with the same bank offering 3.25% for senior citizens over the same tenure.
Alliance Bank Bhd has the next best package at 2.95%, followed by other banks offering 2.85%.
