Interest rate risks for the overall Malaysian banking system is low.

 

Is SVB a canary in the coal mine?

Clearly, the situation is quite different in Malaysia. For starters, pandemic cash handouts were far smaller and, while deposits also rose during the pandemic — owing to loan moratoriums and lower spending — it was nowhere near the scale of that in the US. Total deposits increased from RM1.968 trillion to RM2.186 trillion between March 2020 and March 2022, or equivalent to just about 11% growth (see Chart 2).

And while investments in government and corporate bonds also rose at the outset of the pandemic — as a result of excess deposits and lower loan demand — the increase was small, from 17.9% in January 2020 to a high of 19.7% of total assets in August 2021. Currently, the average bond holdings among Malaysian banks is 19.1% of total assets, or about RM645.2 billion, compared with 24% in the US banking system. Of note, 90% of the total are made up of local bonds — only 10% of which are foreign currency denominated bonds (see Chart 3).

Bank Negara’s tempered OPR hikes limit interest rate risks for banking system …

More importantly, Bank Negara Malaysia has raised the overnight policy rate (OPR) by only 1%, from 1.75% to 2.75% over the same period (compared with the 4.75% hike in the US FFR). Yields for the benchmark 10-year Malaysia Government Securities (MGS) have risen by even less — from 3.6% at the start of 2022 to 3.88% currently. The yield differential is less than 0.3%. This means the drop in value for 10-year MGS is only about 2.3%, based on our back-of-the-envelope calculations (see Table 2).

This is a huge difference compared to the 15.3% drop in value for the 10-year Treasury. Furthermore, unrealised losses for shorter duration bonds will be much lower. For instance, more than half of Maybank’s bond holdings have durations of less than five years.

In short, total unrealised losses for local banks should be much lower. (Incidentally, the majority of loans [79%] are based on floating interest rates, which are repriced immediately on Bank Negara’s policy rate changes.) Therefore, we think interest rate risks for the overall Malaysian banking system is low. Naturally, some banks will be affected more than others. For instance, Maybank, CIMB, Hong Leong Bank, Ambank, Affin Bank and RHB Bank have a higher percentage of bonds on their balance sheets compared with banks such as Public Bank, Bank Islam, Alliance Bank and MBSB. This could be due to a combination of factors, including deposit inflows, the ability to make loans and the target customer market.

https://www.theedgemarkets.com/node/662043

Income-seekers beat frozen bank rates

By Ian Cowie Your Money 


Last updated: February 7th, 2012

Base rates are still frozen - despite rapid inflation

Nearly three years after base rates were frozen at a historic low of 0.5pc,despite inflation running about 10 times that level, savers and investors are waking up to this slow-motion bank robbery – and pouring money into share and bond-based funds to preserve its real value or purchasing power.

Equity income and corporate bond funds dominated the best-selling individual savings accounts (Isas) last month, according to Skandia Investments; one of the biggest Isa platform providers. Nor is Skandia talking its own book. Rival managers M&G and Invesco Perpetual took seven of the top 10 slots.

With the best easy access deposit accounts paying 2.5pc before tax, what’s not to like about shares yielding 3.3pc net of basic rate tax – to take the FTSE 100 index of Britain’s biggest blue chips as a benchmark – or corporate bonds yielding even more?

It ain’t rocket science. Other sources, including Capita – Britain’s biggest share registrars – have been reporting rising investment by individuals for months now. Shares not only offer a higher initial yield to income-seekers but also the prospect of capital gains in future, if the current recovery in stock markets continues.

True, there is no guarantee that you will get your money back from investments in shares or corporate bonds; the latter being IOUs issued by big companies. In both cases, stock market setbacks may mean you get back less than you invest. But unit and investment trusts provide a convenient and effective way to diminish the risk inherent in stock market investment by diversification.

While the Government adheres to its unspoken policy of running negative real interest rates to inflate away its debts, the only certainty bank and building society deposits offer to long term savers is the certainty of becoming poorer slowly. Yorkshire Building Society reckonsthe average savings account lost nearly £2,500 of its real value over the last decade.

Perhaps the big surprise is that it took so long for people to wake up to what is going on. Most bank and building society deposits’ apparent security is a sham over anything other than the short-term while they fail to match the rate at which inflation is eroding what these savings can buy.

http://blogs.telegraph.co.uk/finance/ianmcowie/100014666/income-seekers-beat-frozen-bank-rates/

Tip: Check your saving account rates and if they are derisory, move on. Look for the latest saving deals.

Savings

A bank adviser was recently caught out in a Which? investigation when he told the undercover researcher: "Let's face it, the major banks aren't going to go under."

Employees who worked at Lehman Brothers would testify otherwise and it makes sense to take any risk of it happening on British soil out of the equation.

So don't hold more than £85,000 with any one banking institution: this is the maximum that the Financial Services Compensation Scheme (FSCS) would repay should a bank go under. This is a per-person limit, so those with joint accounts can have up to £170,000 fully protected by the FSCS.

Remember that many banking institutions, such as Lloyds, run more than one brand – but most will cover only a maximum of £85,000 across the group.

Tip: The number of savings accounts paying interest of 0.1pc has increased by 23pc over the past year, according to Which? Check your rates and, if they are derisory, move on. See page 9 for the latest savings deals.

http://www.telegraph.co.uk/finance/personalfinance/investing/8932939/Eurozone-crisis-surviving-the-second-credit-crunch.html

Making sense of direction and level of Short term interest rates

Strategy: Short term interest rates will tend toward the inflation rate plus the economic growth rate

There is always a great deal of discussion about interest rates, particularly US rates. Short term rates are set by governments and this can be a fascinating process to watch. The rates affect the economy and many of the markets.

The benchmark strategy helps to make sense of discussions about their direction and their level. It is a rough guide which is often missed by many commentators. With this rough valuation target, interest rates are easier to understand than most markets, where it can be hard to have a clue what the prices should be. Equities, the market that most investors concentrate on, do not have this kind of benchmark.

An interest rate is made up of the inflation rate plus a 'real' rate. That is, the real interest rate is what is left after allowing for inflation.

Interest rate
= Inflation + 'Real interest rate'

The economic growth rate is the percentage expansion or contraction in the economy with inflation stripped out. It can be loosely considered as the dividend paid by the economy in general.

Economic Growth rate
= Rate of expansion or contraction in the economy - Inflation

Rate of expansion or contraction in the economy
= Inflation + Economic Growth rate

Over time, the real interest rate moves towards the economic growth rate. In that way, the return from interest rates and the return from the economy in general, are equal.

In 2005, the short term rates in the US are 1%. When they start to rise, how far could they go? In the US in 2005, you may wish to target 4% because inflation was around 2% and growth was also around 2%. Add them and you get the target.

Rates had started moving lower worldwide and the question was, how far they could fall? Using the rate of contraction in the economy and the inflation rate gives you an estimate of the economic growth rate. As over time, the real interest rate moves towards this economic growth rate, using this simple strategy, you can have an idea how much further interest rate could move and in which direction.

As the level of interest rates are somewhat predictable, this benchmark strategy helps you to invest intelligently in the bond market.