This article first appeared in The Edge Malaysia Weekly on May 13, 2024 - May 19, 2024

AS the barriers to entry into the banking industry have been somewhat lowered because of the proliferation of digital banking products, coupled with the launch of Account Flexible (Account 3) by the Employees Provident Fund (EPF), analysts and economists alike believe competition for deposits will only intensify.

It will not become too much of a problem for the traditional banking industry, however, as the banks do not compete only on deposit rates, but rather on a slew of other products and services, especially investment products.

Samuel Woo, banking sector analyst at MIDF Research, says: “I do not expect the banks to experience too much trouble. Banks have other means of competing other than interest rates — they offer different services, cross-selling, among others.

“[Services] such as wealth management allow banks to tap into the high-net-worth individual base, which provides far more attractive margins than the mass-market segment which higher rates usually attract.

“Putting money in fixed deposits (FDs) is also a lot more accessible. If anything, we think Account 3 will provide more benefit to asset quality, as it improves debt-servicing ability in the short term.”

Although the banks are well positioned to deal with the new challenges, their cost of funds and margins will be shaped by the competition for deposits, especially if rivalry heightens among the banks and their digital counterparts.

So far, observers say, this has yet to materialise, as they believe the digital banks will also need to show profits — hence the reason that promotions of higher-than-average interest rates offered by banks and digital banks are only for a limited period.

GX Bank — a joint venture between Grab Holdings Ltd and Singapore Telecommunications Ltd, and the first of three Bank Negara-approved digital banks to start operating in Malaysia — offered a promotional rate of 5% a year calculated daily, between April 10 and May 9.

Meanwhile, Kenanga Digital Investing (KDI) — which is not a digital bank but, instead, the digital investing arm of Kenanga Investment Bank Bhd (KL:KENANGA) — offered a tiered deposit rate of between 3% and 4% a year.

OCBC Bank (M) Bhd also has a promotional interest rate of 5% a year on its 360 Account, albeit only for two months, with the promotion running between March 1 and June 30.

There are also fixed and term deposit campaigns by Affin Bank Bhd (KL:AFFIN), which offer customers interest rates of 28.88% a year on a RM10,000 deposit that is maintained for one month, 13.88% for three months and 8.88% for six months. These are based on terms and conditions, and product bundling. The campaign runs between April 1 and July 31.

Nevertheless, the three-month (3M) Kuala Lumpur Interbank Offered Rate (Klibor) has been inching up since late February, rising to 3.59% on May 9 from 3.55% on Feb 27. It has stayed at 3.59% since March 29.

The highest 3M Klibor over the last 12 months was 3.77% between mid-December 2023 and early January 2024.

The rising 3M Klibor was perhaps due to the higher-for-longer narratives from the US Federal Reserve, says Dr Afzanizam Abdul Rashid, chief economist and social finance at Bank Muamalat Malaysia Bhd. “At best, deposit rates will continue to stay high as customers continue to ask for a higher rate. It’s like a buyers’ market, where the customers have the upper hand in dictating the rates, while the banks would need to stay liquid to meet their liquidity requirement.”

The banking system’s liquidity coverage ratio (LCR) fell to 150% in March, from 161% in December 2023. It was the third consecutive month of a declining LCR, after the ratio slipped to 160% in January and 154% in February.

Apart from the banks and their digital counterparts, the EPF Account 3 is another savings option for members to consider, given the retirement fund’s relatively higher annual dividend rate compared with the interest rates offered by the banks.

The EPF Account 3, by virtue of the withdrawal at any time for any reason feature, has made it essentially a savings account for members. Members can also top up their annual EPF contributions up to RM100,000, of which 10% will be allocated for Account 3.

Over the last 10 years, EPF’s dividend rate averaged 5.43% a year for the syariah account, and 5.95% for the conventional account.

This makes the EPF Account 3 a savings account in which members can deposit up to an extra RM10,000 every year, and expect a return that is conventionally higher than that offered by banks through savings and FD accounts.

All these contribute to the narrative of heightened competition for deposits.

The banking system’s total deposits grew 5% year on year (y-o-y) in March, which is below the 5.5% to 6% growth that MIDF Research expects for 2024 for now.

“We reckon that as banks are progressively repricing down their fixed deposit offerings, depositors may hold back in committing to longer-term deposits, which may see a spike in the latter half of CY2024,” says MIDF Research in a May 2 note on the banking system.

In a May 2 banking system note, RHB Research says feedback from the banks indicates that the competition for deposits has eased from the December 2023-to-February 2024 period. It also says competition for deposits may pick up in the second half, especially if the momentum of loan growth remains solid.

Total loans in the banking system grew 6% y-o-y in March, driven by the household, finance, and wholesale and retail trade segments.

“The banking system is currently growing faster than our forecast 4.5%-to-5.5% y-o-y target for 2024, which we will keep for now.

“We note that year to date, loan applications and approvals have been flat y-o-y and — assuming this trend stays put — coupled with the base effect from loans growth picking up towards end-2023, overall growth could decelerate in the later part of the year,” says RHB Research.

Bank Muamalat’s Afzanizam cautions that banks’ net interest margins will remain thin; thus, they would need to beef up their non-fund-based income such as fees and, perhaps, gains in the trading of securities.

“Also, they need to really focus on improving productivity by way of digitalisation that will improve the customers’ experience,” he says.

Most research houses are maintaining their “neutral” stance on the banking sector at the moment. Kenanga Research has an “overweight” call, however, as the dividend yields still appear attractive on most banks.

“Market tailwinds (that is, persistent loans growth and GDP [gross domestic product], better margin retention) are expected to continue to outweigh industry headwinds (that is, inflationary pressures, a weaker ringgit), which we believe may lead to fewer tests to the sector’s resiliency.

“We had seen meaningful moves in share prices with the inflow of foreign investors looking to accumulate sector heavyweights,” it says.

Its top picks for the second quarter of 2024 include Public Bank Bhd ­(KL:PBBANK) and RHB Bank Bhd (KL:RHBBANK), with target prices of RM5.10 and RM7.25 respectively. It also favours AMMB Holdings Bhd (KL:AMBANK) for its solid fundamentals, which are comparable to its large-cap peers.

“Its leading current account-to-savings account level may provide the group with nimbleness to balance its interest margins with market share acquisition strategies,” says Kenanga in the May 2 note. It has a target price of RM4.80 on Ambank. 

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