A further 100-basis-point rise in bond yields could reduce Malaysian banks’ aggregate Common Equity Tier-1 (CET-1) capital ratio by about 46 basis points, although the impact should remain manageable due to Basel III-related capital relief and other mitigating measures, according to RHB Research.
RHB said the estimated sector-wide mark-to-market impact would amount to around RM8 billion at group level, with Bank Islam Malaysia Bhd, Alliance Bank Malaysia Bhd and Malayan Banking Bhd among the more sensitive banks.
At group level, RHB estimated a 100bps parallel shift in yields could reduce CET-1 ratios by 88bps for Bank Islam, 62bps for Alliance Bank, 57bps for Maybank and 52bps for CIMB.
At the bank-entity level, the estimated impact ranges from just 11bps for Affin Bank to 104bps for Maybank, with Bank Islam and Alliance Bank also relatively more exposed.
By comparison, AMMB Holdings Bhd and Public Bank Bhd are viewed as better insulated.
RHB maintained AMMB, Maybank and Hong Leong Bank as its top sector picks.
Smaller Capital Buffers Than 2021-2022
RHB noted that the banking system weathered the sharp bond sell-off in 2021 and 2022 relatively well.
During that period, the 10-year Malaysian Government Securities yield climbed to 4.07% at end-2022 from 2.69% at end-2020, while the sector recorded an estimated RM16 billion in fair-value losses on securities classified as fair value through other comprehensive income.
Despite this, sector CET-1 ratios largely remained within the 14%-15% range, supported by strong earnings growth, large FVOCI reserve buffers and dividend reinvestment plans.
Banks also shifted more new securities purchases into held-to-maturity portfolios to reduce mark-to-market volatility.
This time, however, RHB said the sector has thinner cushions. FVOCI revaluation reserves currently stand at only about RM3.9 billion, compared with approximately RM9.7 billion previously.
AMMB is the only bank where its FVOCI reserve is estimated to exceed the potential hit from higher bond yields.
Basel III Reforms To Help Standardised Banks
RHB said banks using the standardised approach, including Public Bank, Hong Leong Bank, Alliance Bank, Affin Bank and Bank Islam, should benefit from capital release arising from Basel III reforms, which could offset much of the near-term mark-to-market impact.
For banks using the Internal Ratings-Based approach, RHB said measures such as corporate restructuring and dividend reinvestment plans could provide additional capital support.
The impact from securities classified as fair value through profit or loss is expected to be considerably smaller. Based on previous Bank Negara Malaysia stress tests, RHB estimated a 100bps yield move could have an impact of up to only around 6bps, reflecting the smaller size of FVTPL portfolios relative to FVOCI and held-to-maturity books.
Middle East Conflict Risks Still Contained
RHB also highlighted Bank Negara’s assessment that risks from the Middle East conflict are being transmitted mainly through the real economy and financial markets rather than through banks’ direct exposure to the region.
Higher input and logistics costs, together with softer demand, are putting pressure on business margins, particularly among SMEs in wholesale and retail trade, construction and manufacturing.
However, RHB noted that overall asset quality remains stable, with business impairment at 2.8% and the system-wide impairment ratio at 1.4%, while stress remains concentrated in selected segments rather than becoming systemic.
On funding conditions, RHB said BNM had attributed the rise in KLIBOR partly to thinner liquidity in the benchmark itself, although average banking-sector funding costs have also increased.
Regulatory liquidity ratios remain healthy, while the central bank appears comfortable with banks operating at somewhat lower liquidity levels rather than aggressively competing for higher-cost funding.
