KUALA LUMPUR: Malaysia’s banking sector could see improved net interest margins (NIM) and earnings from an anticipated 25-basis-point increase in the overnight policy rate (OPR) to 3.0 per cent in the first half of 2027.
However, intensifying deposit competition could limit the benefits, says Hong Leong Investment Bank Bhd (HLIB).
The firm estimates that the rate normalisation could lift banks’ calendar year 2027 (CY27) NIM by between 1.9 and 6.2 basis points, translating into a 1.3 to 9.3 per cent increase in profit after tax and minority interests (PATAMI).
It said Malaysia’s stronger-than-expected economic performance had reduced the need for the additional monetary support introduced through Bank Negara Malaysia’s July 2025 OPR cut to 2.75 per cent, which was intended to cushion the economy against external uncertainties, including US tariffs.
Gross domestic product expanded by 6.0 per cent year-on-year in the second quarter of 2026, while the advance estimate for the third quarter showed growth of 5.3 per cent.
Against this backdrop, HLIB’s economics team expects a 25-basis-point OPR normalisation in the first half of 2027, likely towards the later part of the period.
For its analysis, the firm assumed the increase would take place in June 2027.
HLIB said all banks under its coverage would see a positive CY27 NIM uplift, although the magnitude would vary considerably depending on their funding structures and exposure to floating-rate loans.
Its sensitivity analysis showed that Bank Islam Malaysia Bhd could record the largest improvement of 6.2 basis points, followed by Alliance Bank Malaysia Bhd and Public Bank Bhd at 5.8 basis points each.
RHB Bank Bhd was expected to see a 5.5-basis-point uplift, followed by Affin Bank Bhd at 5.1 basis points and AmBank (M) Bhd at 4.7 basis points.
Malayan Banking Bhd (Maybank) was projected to record a more moderate improvement of 3.3 basis points, while CIMB Group Holdings Bhd trailed at 1.9 basis points.
HLIB said the estimates represented the average NIM impact for CY27, incorporating both the initial benefit from asset repricing and the subsequent catch-up in funding costs.
The analysis assumes floating-rate loans are repriced within one month, while current account and savings account (CASA) funding costs take six to nine months to adjust, with a base case of 7.5 months.
The estimated PATAMI uplift ranges from 1.3 per cent to 9.3 per cent in CY27, although the relatively larger sensitivities for Bank Islam and Affin Bank partly reflect their smaller earnings bases.
HLIB said banks’ ability to sustain the initial margin gains would depend on how effectively they manage funding costs amid intensifying deposit competition.
The median loan-to-deposit ratio (LDR) across its coverage rose to 95.5 per cent in the second quarter of 2026 from 92.6 per cent in the first quarter of 2024, pointing to tighter liquidity conditions.
It added that most banks were also operating below their respective NIM peaks recorded since 2024, suggesting that a return to previous margin levels could prove increasingly difficult as competition for deposits accelerates funding-cost increases.
Despite the potential earnings boost, HLIB viewed the anticipated OPR increase as an incremental earnings tailwind rather than a catalyst for a broader sector re-rating.
It said the stronger economic backdrop underpinning its rate outlook should also support financing demand and asset quality, providing broader fundamental benefits beyond margin expansion.
The firm maintained its “Neutral” rating on the banking sector, noting that banking stocks were trading at 1.08 times forward price-to-book value.
This was broadly in line with their five-year average of 1.09 times, leaving limited room for a broad-based re-rating.
Nevertheless, HLIB saw selective opportunities following the recent sell-off, upgrading RHB Bank Bhd to “Buy” from “Hold” with a higher target price of RM8.40.
It said the bank’s upcoming capital management plan provided further potential for capital returns, while its positive sensitivity to OPR normalisation strengthened its investment case.
The combination of attractive dividend yields, potential capital returns and positive rate sensitivity had made RHB’s risk-reward sufficiently attractive.