Stock Infographics

The real reason for sluggish bank share price [Not competition from Digital Bank]

Publish date: Fri, 06 May 2022, 04:24 PM
Visual content on financial market and investment trends

An increase in interest rate is good for banks as banks can receive a higher interest income from their loan book. However, the share prices of Malaysian banks have been sluggish despite the interest rate has shot up over the last few months.

* Screenshoot from Maybank Annual Report 2021

The assets of a bank are mainly made up of loans (The money borrowers owed to banks) and financial assets hold (Government Bonds). In the case of Maybank, Malaysia's largest bank, Maybank holds 214 billion of financial assets and has a loan book of 541 billion.

If you are repaying your monthly mortgage, you will realize that the monthly repayment and the interest rate remain the same. The interest rate of loans in Malaysia is mainly determined by our Overnight Policy Rate (OPR), which is still fixed at 1.75%, hence there is no increase in interest income for banks from their loan assets.

Source: iSquare MGS Yield

On the other hand, the interest rate of Malaysia Government Bond had shot up so much. The yield of Malaysia Government Securities (MGS) has moved up tremendously if you compare Apr 2022 with Dec 2021. A higher interest rate means a lower bond price. As the bond price falls, there should be some adjustment (downward adjustment) in the value of financial assets held by banks. This Far Value Adjustment is not going to impact the profit and loss statement, but it will appear on Other Comprehensive Income, which will eventually affect the book of banks.

This is hard to understand if you are not from an accounting background. In short, you just need to know the price of the assets held by banks and this affects the book value per share of the banks. This is significant to the bank's share price as banks are valued at Price to Book (P/B) multiples.

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