THE government should always look out for the well-being of its people rather than protect banking institutions, DAP chairman Lim Guan Eng said today.

Alleging that banks made handsome profits even during Covid-19 pandemic despite sanctioning loan moratoriums, the former finance minister urged the government to demand banks share their “good fortune” following the rise in overnight policy rate (OPR).

“This is borne out by the fact that when the OPR was at 3% pre-pandemic, the banking industry recorded healthy pre-tax profits of RM41.5 billion in 2019,” the Bagan MP said in a statement today.

“When the OPR was reduced to 1.75% by Bank Negara Malaysia (BNM) during the Covid-19 pandemic, the banking industry still managed to record RM28.5 billion and RM33.7 billion in pre-tax profits, in 2020 and 2021 respectively, despite also having to bear the cost of interest rate waiver and bank loan moratorium for the lower income groups.

“With the OPR slowly creeping back up to the pre-pandemic level, the banking industry’s outlook is profitable.

“However, banks should not have all the optimism of a brighter future at the expense of their borrowers suffering from paying a higher interest rate.

“The government should protect the people and not the banks’ profits by demanding that banks share their good fortune following the rise in OPR,” the DAP lawmaker added.

Two weeks ago, BNM raised the OPR by 25 basis points to 2.5%. This is the central bank’s third consecutive rate hike, after increases to 2.25% in July and 1.75% in May respectively.

Businesses and consumers associations have expressed their unhappiness at the recent OPR increase, saying it will negatively impact economic recovery.

Lim said that the government should heed the requests from the bottom rung of individual borrowers and the business community, particularly small-medium enterprises (SMEs), for an interest rate waiver and bank loan moratorium for a period of three to six months.

He said the banking industry’s profits can sustain this cost, while helping the poor and SMEs overcome higher prices, the rapidly depreciating ringgit, a severe labour shortage, red tape, failed policy decision making, U-turns and poor governance.

Lim said there was a strong perception that the government prioritises banks over their borrowers when it gave assurances that BNM’s OPR increase by 25 basis points to 2.5% does not enrich the banks because they also have to pay higher interest rates to depositors.

“Such a defence is not even supported by the banks’ own research houses,” he said.

Citing Hong Leong Investment Bank Bhd Research, Lim said that banks typically gain from a rising interest rate environment.

“Banks are still net beneficiaries following the BNM increase of the OPR, as the net interest margin (NIM) is anticipated to widen.

“NIM is a measure of the difference between the interest income generated by banks and interest paid out to depositors. A wider NIM indicates higher earnings for banks,” he said.

Lim added that according to Hong Leong, it is estimated that every 25bps OPR hike would expand the NIM by five to six basis points.

This would heighten earnings forecasts by 4-5% on a full year basis, without taking into account potential market-to-market losses and higher defaults.

As for CGS-CIMB Research, Lim said it had indicated that the OPR increase is likely to benefit banks, as their floating rate loans are larger than their fixed deposits, both of which are adjusted upwards when the OPR is increased.

It added that if OPR hikes in 2023 were factored in, every additional 25 basis points hike would increase banks’ net profit forecasts for banks by an estimated 2.1%.

Lim also cited PublicInvest Research, where it said that all banks, in general, will benefit from a rising rate environment. – September 18, 2022.