Business

Friday March 13, 2009

Net interest margins may recover next year

By YVONNE TAN


PETALING JAYA: With the recent massive cuts in the overnight policy rate (OPR), it is no secret that the banking industry will see a contraction in net interest margins.

“On average, we believe net interest margins would see a decline of 20 to 25 basis points this year,” a senior analyst covering the sector said.

“The trend is definitely downwards. Some recovery should take place next year as the impact of lower deposit rates is reflected.”

Net interest margin, one of the main benchmarks for a bank’s profitability, refers to the difference between interest income generated by the bank and the amount of interest paid out to its lenders in terms of deposits, for example.

With Bank Negara’s three major cuts in the OPR since November, bringing it down to 2%, banks now have to contend with disbursing loans at a much lower rate than before, causing a squeeze in their margins.

Analysts said lower margins could be offset by the lower statutory reserve requirements from 4% in November last year to 1% effective March this year and a reduction in the deposit rates they offered customers.

OCBC HQ in Kuala Lumpur. The bank expects net interest margin to decline marginally this year.

“Banks with a huge portfolio of hire-purchase loans with fixed interest rates also help mitigate the contraction, as with the repricing of loans and deposits which could help net interest margins rise again, moving forward,” said an analyst.

“It really depends on the bank,” said Jupiter Securities head of research Pong Teng Siew when asked to what extent local banks’ net interest margins would be affected. As for the country’s two largest banks, Malayan Banking Bhd and CIMB Bank Bhd, they are “better protected” as they have stakes in Indonesian banks.

“Generally, net interest margins in Indonesia are considerably higher than in Malaysia,” Pong said. On average, net interest margin in Indonesia is one of the highest in the region at 5% to 6% versus 2% to 3% in Malaysia.

Asked to comment, OCBC Bank (M) Bhd director and chief executive officer Jeffrey Chew said the bank expected net interest margin to decline marginally this year.

“Operating on a lower cost-to-income ratio compared with the industry, OCBC will continue to reap productivity gains from its process redesign and the quality projects it had embarked on several years ago,” he told StarBiz.

For example, to maintain profitability, OCBC will move to reduce variable costs.

“We have always built our business to be scalable and it is not difficult for us to scale our costs according to the prevailing economic climate and business activities,” Chew said.

OCBC’s significant process redesigns and quality projects had collectively brought it accumulated savings of about RM50mil per year. “We do not intend to hold back on these measures,” he said. Chew declined to reveal the bank’s current net interest margin.

Meanwhile, it was reported last month that Public Bank Bhd expected its net interest margin to be lower but the impact on the group’s earnings would not be significant, as the central bank’s rate cut would be mitigated by the drop in deposit rates.

Chief operating officer Leong Kwok Nyem said the latest rate cut would affect Public Bank’s net interest margin by two to three basis points compared with 10 to 20 basis points in the previous two reductions.

Public Bank’s current core and overall net interest margins are at 3.2% and 2.4%, respectively.


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