“RHB Capital remains our top pick for the sector. We retain our earnings forecasts for now but could raise our projections if the BR hikes push up banks’ earnings above our expectations in the coming quarters,” it said in a report.

PETALING JAYA: Base rate hikes could be a new earnings catalyst for a few banks, CIMB Research said.

Reaffirming its “overweight” call on the industry, the research house said the call was based on the potential re-rating catalysts of expected earnings recovery this year, and attractive valuations for a few banks.

“RHB Capital remains our top pick for the sector. We retain our earnings forecasts for now but could raise our projections if the BR hikes push up banks’ earnings above our expectations in the coming quarters,” it said in a report.

CIMB Bank has raised its base rate by 10 basis points (bps) to 4.1% effective June 9, 2016. Before this, three other banks had upped their rates – by 10bps each for Hong Leong Bank Bhd (on April 15) and Public Bank Bhd(on May 17) as well as by 20bps for AMMB Holdings Bhd (in December 2015). Three foreign banks in Malaysia also increased their rates by 10bps to 20bps over the past few months.

“Given the escalating cost of funds, we previously thought that banks would increase the spread for housing loans, which would only affect the lending rates for new loans. But the above banks even took a step further by raising their BRs, leading to higher interest charged for all their existing variable-rate loans, which account for more than 50% of their loan books.

“The incremental interest income earned will flow directly to banks’ bottom line, boosting their FY17-18 net profit by an estimated circa 2.8% for Public Bank and 3.1% for Hong Leong Bank,” it said.

CIMB Research said Malayan Banking Bhd (Maybank) so far does not have plans to raise its base rate. However, the research house sees a reasonable chance for it do to so in the near term, considering that two of its biggest competitors have upped the rates.

“We estimate that a 10bp rise in Maybank’s BR would lift its FY17-18 net profit by circa 1.5%,” it said.

The research house said the 10bp rise in several banks’rates lately would have a minimal negative impact on their loan growth and asset quality, as this would only lead to a small increase in borrowers’ monthly instalments.

“Based on our calculation, a 10bp rise in base rate would raise the monthly instalment of a 10-year loan by only 0.7%, which would be easily absorbed by borrowers, in our view,” it added.