KUALA LUMPUR (Oct 7): CIMB Group Holdings Bhd (KL:CIMB), Malaysia’s second-largest lender by assets, fell to its lowest in three months as banking stocks fell amid persistent concerns over rising bond yields.

The surging long-dated bond yields will erode trading gains and capital positions, which could affect dividends at select banks, JPMorgan said in a note on Southeast Asian banking stocks. Cost of funds could rise and investment banking revenue could take a hit as well, the house noted.

Any surprises in the third quarter are “likely skewed negative for quite a few banks under our coverage”, JPMorgan said.

For Malaysia, the house downgraded CIMB to "underweight" from "neutral" and AMMB Holdings Bhd (KL:AMBANK) to "neutral" from "overweight".

Shares of CIMB fell as much as 39 sen, or 5%, to RM7.31, a level last seen on July 3. AMMB, which operates the Ambank franchise, fell 27 sen, or over 4%, to RM6.20. The Bursa Malaysia Financial Services Index, which also tracks non-bank firms such as insurers and stockbrokers, fell to a 10-month low.

Higher yields generally hurt banks as they take larger paper losses from lower prices of the bonds they hold, which eats into capital and forces them to book losses if they sell. Investors may also demand higher returns on corporate bonds, affecting appetite for new issuances.

The US Federal Reserve raised interest rates earlier this month for the first time in three years, sending the yield on the 10-year benchmark Malaysian Government Securities to as high as 4.18% before moderating. Yields, however, have begun climbing again.

In Malaysia, CIMB has the most securities as a proportion of assets at 29%, followed by AMMB Holdings Bhd (KL:AMBANK) and RHB Bank Bhd (KL:RHBBANK) at 25%, JPMorgan noted.

However, RHB has just 6% of its debt portfolio classified under fair value through profit or loss — where changes in market value are booked immediately in the income statement rather than deferred in equity — while CIMB has the highest at 27%. Public Bank Bhd (KL:PBBANK) has the lowest in Malaysia at 3%.