- Banks have started to indicate their respective new base rates (BR) (which replace the base lending rates – BLR) effective 2 January 2015.

- Malayan Banking (Maybank) announced that its new base rate is 3.20%. - CIMB has set its base rate at 4.00%. We believe AFG is also likely to set its base rate at 4.00%.

- Public Bank (PBB) has confirmed its base rate is 3.65%. HSBC Bank Malaysia Bhd had earlier announced that its base rate is 3.90%.

- Thus, base rates for the banks are being set at a range (between 3.20% to 4.00%) that is wider than we had anticipated.

- Furthermore, Maybank’s base rate of 3.20% is unexpectedly low in our view, given that it is below the current Overnight Policy Rate (OPR) of 3.25%. However, we believe this is to provide manoeuvring room, via spreads. We understand that spreads over the new base rate has to be set above the BR, and not at a minus, unlike BLR previously.

- Thus, we believe the differences between the base rates will eventually be adjusted through the different spreads, due to competitive market forces.

- In terms of new mortgage rates, Maybank has indicated that the effective rate for a housing loan (e.g. RM350k) remains at 4.55%. This works out to new mortgage spreads of 1.35% over the new BR.

- CIMB confirmed that its new mortgage rates will be based on BR +0.45% to BR +1.15%. We expect the effective mortgage rate to closely reflect the current level of 4.50%.

- The effective rate is similar to that of PBB, which is BR +0.8% to BR +0.9%.

- In the new guideline, banks are also allowed to adjust the BR to reflect changes to market funding conditions. We understand banks are allowed to use different methodology to estimate cost of funds. We believe some banks are benchmarking cost of funds against 3-month Klibor, while some may be using shorter-term Klibor. In addition, some banks are using an average of the interbank rates over a period of time.

- While the guideline states that banks are allowed to adjust BR to reflect changes to market funding conditions, we understand that banks are not allowed to change the BR over the next one year which is considered the transition period (unless there are changes to OPR). We remain NEUTRAL on the sector.

Source: AmeSecurities