PETALING JAYA: Banks are expected to benefit from no cuts in the overnight policy rate (OPR) supporting their margins and non-interest income while foreign investors, who have pared down their stakes in recent years, may find banking stocks to be good value on decent valuations and yields amid a strengthening ringgit.
Stronger economic data will also attract foreign investors, as advance second-quarter (2Q) gross domestic product (GDP) estimate shared by the Statistics Department showed the economy growing at a steady clip of 5.8% compared with the 1Q GDP of 4.2%.
Data also showed gains across the economy on exports recovery, tourism growth and strong construction activity.
Maybank Investment Bank (Maybank IB) Research analyst Desmond Ch’ng said in a report that banks’ net interest margins (NIMs) are expected to stabilise in the absence of a cut in the OPR.
“In a falling interest rate environment, NIMs tend to compress, as lending yields fall faster than funding costs,” he explained.
Bank Negara last raised the OPR by 25 basis points to 3% in May 2023.
The central bank said following the July 11 monetary policy committee meeting that the current OPR level remained supportive of the economy and is consistent with assessments on inflation and the growth outlook.
Most analysts expect Bank Negara to maintain the OPR at 3% at least through 2025 in anticipation of the withdrawal of the blanket RON95 petrol subsidy that will contribute to inflation.
Ch’ng believes that there is potential for NIMs to rise further in 2025 after a five-basis-point recovery in 1Q24.
“Anecdotal evidence would suggest that funding costs continue to be elevated presently, but competition has remained less intense,” he said.
He added that growth in current account-savings account balances have been encouraging and will help ease margin pressure.
Ch’ng noted that the bank’s fixed income research team remains “mildly bullish” on Malaysian Government Securities, forecasting a 10-year yield of 3.60% by year-end from around 3.70% currently.
Bond yields and prices have an inverse relationship.
“What this implies is that banks could potentially continue to realise marked-to-market gains on their investment portfolios, which would serve to uphold non-interest income.
“Moreover, the volatility of the currency would serve to ensure that foreign-exchange income remains buoyant,” he said.
Maybank IB Research has maintained a “positive” call on banking stocks.
The research house believes the current macroeconomic environment, coupled with a strengthening currency and positive banking outlook is conducive for further foreign inflows into banking stocks, with foreign buying in recent months for AMMB Holdings Bhd
, CIMB Group Holdings Bhd and Malayan Banking Bhd, which respectively had 25.3%, 32.1% and 19.5% foreign shareholdings respectively as of June 2024.
