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Competition likely to squeeze banks’ margins [11-01-2011]  
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Competition among banks to shore up their deposits is expected to put a dent on margins although the impact may be cushioned by further interest rate hikes this year, analysts said.

Banks are trying to attract deposits by offering higher rates and this might result in lower loan yields, thus putting a squeeze on their net interest margins (NIM).

“Any rise in interest rates will normally see loan yields, or interest rates on loans, growing at a faster pace than deposit rates, boosting the NIM of banks. We expect NIM to be around 2.23% this year from its present range of 2.25% to 2.3%,” the analyst added.

As part of Bank Negara's normalisation exercise, it had raised the overnight policy rate (OPR) to 2.75% in July last year. The next monetary policy committee meeting is scheduled on Jan 27.

Some analysts expect NIM to increase marginally during the first half of the year on continued momentum from the upward re-pricing of loan assets.

However, margins are likely to come under pressure in the second half of the year as the pace of deposit mobilisation intensifies among banks.

“Loans growth is expected to pick up during the second half of the year. As the loans-to-deposit (LTD) ratio of the banking sector is about 81%, the banks will be pressed to mobilise deposits during the second half of the year to cater to the increased demand for loans and maintain loan-to-deposit ratios at an acceptable level.

This may result in higher interest rates to attract deposits,” said Malaysian Rating Corp Bhd (MARC) vice-president and head of financial institution ratings Anandakumar Jegarasasingam,

The LTD ratio refers to the amount of a bank's loans divided by the amount of its deposits at any given time. The higher the ratio, the more the bank is relying on borrowed funds, which are generally more costly than most types of deposits.

Over the last six months, there had been various promotions in the media offering deposit products and this was more so for banks with a smaller deposit base, said another analyst from a bank-backed brokerage.

RAM Ratings head of financial institution ratings Promod Dass said banks' regional foray could help them earn higher margins, as stiff competition especially in retail banking drove them to look further offshore.

Banks that already had a toe-hold in the region would further entrench their positions to extract more value out of their acquisitions.

“The relatively higher margins and larger markets offered in these regional markets, particularly in Indonesia will to some extent, offset the margin compression trend in the Malaysian market.

“Any further normalising of interest rates this year will also help to give a temporary lift to banks' margins, given that the bulk of financing is in floating rate loans and there is usually a lag in the repricing of deposit rates,” Dass said.

AmResearch noted that as the average lending rate was stabilising, there could be less pressure on NIM.

In November last year, the average lending rate was stable at 4.99%, which was a turnaround from the unexpectedly large drop of 10 basis points, month-on-month, in October.

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