- Bank Negara raises interest rates by 25bps. At the Monetary Policy Committee (MPC) meeting yesterday, Bank Negara Malaysia (BNM) decided to raise the Overnight Policy Rate (OPR) by 25 basis points to 3.25%. The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 3.00% and 3.50% respectively.

- Base lending rate likely to be adjusted upwards by a similar quantum. We expect banks to announce a similar upward movement in the base lending rate in the next few days, in line with historical trend.

- This is the first rate hike since 2011. This signifies the first rate hike since 2011, with OPR now moving towards 3.50% held before the 2008 crisis.

- Banks generally benefit from the hike due to re-pricing effects. The banks which benefit the most from the immediate re-pricing of variable rate loans and lag impact of deposit re-pricing are:- (i) AFG, with potential short-term earnings growth of 3.8%; (ii) PBB (2.3%); and (iii) HLBB (1.7%). (See our earlier report dated 20 June 2014).

- Despite the immediate positive impact on net earnings, we expect new concerns over impaired loans. Despite the immediate positive impact to net earnings, we expect fresh concerns over impaired loans as household debt has increased substantially since 2008.

- In addition, we think that the rate hike will partly compensate for higher cost of funds. Furthermore, interbank rates have started to rise in the past eight months since November 2013. As an indication, the 3-month interbank rate has now surpassed 3.40%, which is about 30bps higher than the 3.10% level seen before November 2013. Thus, we believe that any rate hike ahead may be viewed as compensation for the already elevated cost of funds for the interbank market.

- Maintain NEUTRAL. To conclude, we reaffirm our view that the rate hike is likely to be viewed as an offsetting compensation for the potential downgrade in net earnings that may have occurred due to higher cost of funds or possible increase in impaired loans. Maintain NEUTRAL on sector. 

Source: AmeSecurities