The strong perception that the government prioritises banks over their borrowers is confirmed when it gives assurances that Bank Negara’s Overnight Policy Rate(OPR) increase by 25 basis points (bps) to 2.5%, does not enrich the banks because they also have to pay higher interest rates to depositors. Such a defence of the banking sector that the OPR increases does not enrich banks, is not even supported by the banks’ own share research houses on 9 September 2022.
Hong Leong Investment Bank Bhd (HLIB Research) said that banks typically gain from a rising interest rate environment. Banks are still net beneficiaries following Bank Negara’s increase of the OPR, as the net interest margin (NIM) is anticipated to widen. NIM is a measure of the difference between the interest income generated by banks and interest paid out to depositors. A wider NIM indicates higher earnings for banks.
HLIB Research estimated that every 25bps OPR hike would expand sector net interest margin (NIM) by five to six bps. This would heighten earnings forecasts by 4-5% on a full year basis, without taking into account of potential market-to-market losses and higher defaults.
CGS-CIMB Research stated that the OPR increase is likely to benefit banks, as their floating rate loans are larger than their fixed deposits, both of which are adjusted upwards when the OPR is increased. It added, “If we were to factor in OPR hikes in 2023, every additional 25 bps hike would increase our net profit forecasts for banks by an estimated 2.1%.
PublicInvest Research noted that all banks, in general, will benefit from a rising rate environment. The only difference is not if the banks will record extra profits, but by how much? Clearly, only the government believes that the banks do not earn more profits from a rise in the OPR.
This is borne out by the fact that when the OPR was at 3% during pre-COVID pandemic, the banking industry recorded healthy pre-tax profits of RM41.5 billion in 2019. When the OPR was reduced to 1.75% by Bank Negara during the COVID-19 pandemic, the banking industry still managed to record healthy pre-tax profits of RM28.5 billion in 2020 and RM33.7 billion in 2021, despite also having to bear the cost of interest rate waiver and bank loan moratorium for the lower income groups.
With the OPR increase slowly creeping back up to the pre-pandemic level of 3%, the banking industry possesses a profitable outlook. However, banks should not have all the optimism of a brighter future at the expense of their borrowers suffering from paying a higher interest rate. The government should protect the people and not the banks’ profits by demanding that banks share their good fortune following the rise in OPR.
For this reason, the government should heed the requests from the bottom rung of individual borrowers and the business community, particularly SMEs, for an interest rate waiver and bank loan moratorium for a period of 3-6 months. The banking industry’s healthy profits can sustain the cost of an interest rate waiver and a bank loan moratorium to help the poor and SMEs, overcome higher prices, rapidly depreciating ringgit, severe labour shortage, bureaucratic red tape, failed policy decision making and U-turns and poor governance.