Hike funding

Rising financing costs


PETALING JAYA: After being low for many years, global policy interest rates have started to rise, driven by inflationary pressures.

For banks, in general, this is a good thing because higher interest rates tend to translate into higher profits.

However, there is also the issue of a higher cost of funding for lenders as interest rates move north.

Bank Negara, in its latest Financial Stability Review, warned that banks are likely to face tighter funding conditions this year.

“Normalization of monetary policy in advanced economies could lead to outflows of funds from emerging market economies, including Malaysia, and therefore increase funding costs,” he said.

Domestically, a preference for higher-yielding fixed deposits among depositors as uncertainty wanes and renewed competition from banks for deposits to support loan growth as the economy recovers could also put upward pressure on funding costs, the central bank added.

He, however, indicated that the impact of the developments on banks should remain manageable due to their strong liquidity and funding positions.

The cost of funding for banks basically refers to the amount that lenders have to spend to obtain funds which are then loaned to their customers, allowing the lenders to earn a profit.

These funds are normally obtained from deposits made by customers on which banks have to pay interest.

In Malaysia, according to the benchmark overnight rate (OPR), the higher the interest on deposits, the more a bank has to spit.

Industry watchers have dismissed that concern for the time being, however.

“The cost of funds for banks will increase when the RPO increases.

“Usually a large portion of a bank’s loan books will be based on floating rates, which means they will charge higher interest on mortgages and business loans when the RPO increases, and that it will also pay higher rates to fixed deposit customers,” a former CEO of the foreign bank said.

“Generally, banks will have more interest-free deposits like checking and savings accounts (CASA), therefore they will benefit overall from interest rate hikes,” he said.

He is “neutral” on whether banks will see significant increases in their cost of funds.

“In addition, the OPR was expected to increase in the first quarter of this year.

“We are extending the action because of the Ukraine-Russia war and the Covid-19 pandemic,” he added.

MIDF Amanah Investment Bank Bhd’s head of research, Imran Yassin Yusof, said while rising interest rates would lead to an increase in the cost of funds for banks, they would also see higher lending rates.

“This will negate the impact of the rising cost of funds. Therefore, we don’t see it as a challenge at this point,” he told StarBiz.

Imran said banks would raise lending rates to maintain net interest margins going forward.

“The only black swan for banking this year will be if there is a more deadly variant of Covid-19 like what we saw with the Delta variant last year. However, we believe the likelihood of that happening is low, especially since our healthcare system is better equipped this time around.

AMMB Holdings Bhd Group (AmBank) CEO Datuk Sulaiman Mohd Tahir said if rates were to rise, banks would expect more pressure on the cost of funding, especially for those that rely more on short-term funding.

Datuk Sulaiman Mohd TahirDatuk Sulaiman Mohd Tahir

“For AmBank, approximately 80% of our loan portfolio is variable rate and will be repriced immediately. At the same time, our cost of funds will not be repriced until later, as our fixed deposits and term funding costs have been stalled in the short term,” he told StarBiz.

Sulaiman said AmBank’s asset quality and risk profile had been strengthened over the years and as a result the group had a more diversified loan mix that was less sensitive to concentration risk and rate changes. of interest.

“We see earnings in the National Banking System on the road to recovery with higher profitability expected this year due to lower loan loss provisioning and a higher net interest margin. Looking further ahead Going forward, there could be potential reversals of management overlays provided by banks for Covid-19 credit risks if banks’ gross impaired loan ratios do not increase significantly in 2022,” Sulaiman added.

That said, the mid-sized lender is actively increasing its liquidity deployment strategy to manage market price risk from rising interest rate trends.

“It’s not just about managing risk, it’s also about taking advantage of opportunities as part of our business as usual. With the expected increase in the cost of funding, competition for deposits will be stronger,” noted Sulaiman.

He said optimizing the funding mix while focusing on more aggressive CASA growth was necessary to manage this.

“We are also focused on securing longer-term funding through capital markets issuance,” he added.

While Malaysian banks, in general, have negligible direct exposure to geopolitical tensions related to Russia and Ukraine, banks may be indirectly affected if energy and commodity prices are high for an extended period. , because they could in turn harm global economic growth, according to Sulaiman.

“Therefore, we are focused on asset preservation with targeted loan growth,” he added.

In its financial stability review report, Bank Negara said the profitability of the banking system was sustained in the second half of 2021, supported by the resumption of lending activities and low funding costs which helped preserve margins. net of interest.

“Banks benefited from low funding costs throughout the year as growth in cheaper CASA deposits outpaced growth in higher yielding term deposits.”