PETALING JAYA: Interest rates on car loans have increased by an average of 0.25 percentage point for national cars and 0.7 percentage point for non-national makes since the overnight policy rate — the benchmark interest rate which determines banks’ lending rates — was revised upwards by 25 basis points to 2.25% in early March.

Dealers said they were already feeling the impact.

New car registrations reached 56,139 units last month, 25% higher than the same month last year, as buyers locked in their purchases before the widely-anticipated interest rate hike.

The real impact on car sales figures would probably be seen from April, according to industry players.

“We are expecting an adverse impact on sales from the recent hike,” Proton Edar Dealers Association Malaysia president Armin Baniaz Pahamin told StarBizWeek.

“Already, national cars have higher interest rates than non-national cars before the hike.”

This is traditionally the case because the credit risk in the national car segment is perceived to be higher than in the non-national car segment as the former tends to target the lower to middle-income earners.

OSK Research in its recent report on the sector noted that dealers had fully capitalised on the recent OPR rate hike in making their earlier sales pitches. “This caused a rush as buyers locked in their orders before the OPR was increased in early March,” the research outfit said.

Proton and Perodua car loan rates had been adjusted to 3.75% for loan tenures of five years and below, 3.9% for six to seven years and 4% for eight to nine-year loans, according to major car dealers. Previously, they ranged from 3.5% to 3.75%.

With the new rates, for example, a person looking to purchase a RM40,000 Perodua car with a five-year loan tenure (at the new rate of 3.75% per annum) will have to pay RM791, or RM8 more, per month.

This goes up to about RM20 more a month for a longer-term loans.

As for new non-national makes, a dealer with Kah Motor Co Sdn Bhd which distributes Honda cars, said hire-purchase rates for new non-national cars had been raised to 3.25% for loan tenures of five years and below, 3.4% for six to seven years and 3.5% for eight to nine-year loans.

Before, hire-purchase interest rates were in the range of 2.4% to 2.8%, he said.

“There is some impact on sales so far. We see some individuals holding back purchases,” the dealer added.

Honda’s market share fell last month on weak sales, sliding 5.8% year-to-date as sales halted largely caused by the impending launch of its new CRV towards the end of this month, OSK Research said.

KUALA LUMPUR: HSBC Holdings plc senior Asian economist Robert Prior-Wandesforde expects Malaysia’s gross domestic product (GDP) to expand 7.3% this year on rising exports fuelled by higher commodity prices and domestic demand.

His forecast for 2010 was revised from the 6.8% made last year and higher than Bank Negara’s forecast of 4.5% to 5.5% in the 2009 annual report.

“We’re looking at a very vigorous V-shaped recovery from the exports side for Asia and Malaysia’s export-led economy will definitely benefit from this recovery,” Prior-Wandesforde told reporters on the sidelines of the Activate Asia: India in Focus seminar organised by HSBC Bank Malaysia Bhd yesterday.

He said there were also signs that private consumption had risen strongly due to confidence in the economy returning.

However, Prior-Wandesforde said while indications suggested growth would be broad-based this year, growth levels would not sustain beyond 2010 but return to trend growth of 4.5% to 5% annually in the next five to 10 years on structural impediments.

He said the reforms suggested by the National Economic Advisory Council to the Government and encapsulated in the recently unveiled New Economic Model were sensible but a lot depended on the delivery.

“Clearly the aim is to raise growth via structural reforms but this will take time. How this is enforced will be crucial as generally, there’s a lot of room for improvement,” he said, citing bureaucratic red tape and corruption among the reasons why foreign direct investment had dropped and domestic investors had invested abroad.

He said there was currently scepticism among investors that the reforms would be implemented. “Investors will need a lot more convincing,” Prior-Wandesforde said.

He expects Bank Negara to raise the rates of the country’s benchmark policy rate – the overnight policy rate (OPR) – by another 75 basis points to 3% this year.

“Any raising of the OPR by Bank Negara should be seen as a normalisation,” Prior-Wandesforde said, adding that this meant the minimal level for policy rates to be considered normal would be 3%. The OPR currently stands at 2.25% after Bank Negara raised it by 25 basis points in March.

On Thursday, the World Bank’s lead economist for East Asia and Pacific Ivailo Izvorski said the region’s real GDP was expected to grow 8.7% this year after it slowed to 7% last year from 8.5% in 2008.

BANK Negara’s decision to raise the overnight policy rate (OPR) by 25 basis points on March 4 must have jolted many people out of their slumber into realising that the days of low lending rates may be numbered.

While some Malaysians, especially those who are risk-averse and prefer to keep their savings in banks, are rejoicing that interest rates on deposits are on the way up, there are those who must be apprehensive that they will have to fork out higher loan interest payments.

Those in the second group, including corporate and retail borrowers, should recognise that the low interest rates that they had been enjoying for close to two years came at a cost.

Malaysians generally have a high propensity to save and the all-time low interest rates have been frowned upon by savers, especially the retirees who are mostly dependent on their interest income to get by in their golden years.

It is only fair that they be compensated for their prudence – a strong trait among Asians that may have saved the region from further financial quagmire brought on by a widening sovereign debt crisis in some western economies.

The recent OPR hike will certainly not be the only adjustment by the central bank, considering the country’s lending rates are still at record lows.

We can expect more upward adjustments in the coming months as there is still room for rates to rise at least another 50 basis points should Bank Negara act in response to a stronger local economy.

Normalising the interest rates by allowing it to be decided by actual market forces of demand and supply is certainly more healthy.

Although there are now more avenues to invest one’s savings, property is clearly a favourite.

Most of the big property companies are raking in record sales and some of the projects, especially those in Penang and the Klang Valley, are once again selling like “hot cakes”.

Although there is no property bubble – a situation where prices escalate to artificially high levels that do not reflect the actual market fundamentals of demand and supply – there may be a chance of this happening if we are not careful.

We only have to look at the many condominium blocks in the Kuala Lumpur City Centre locality. Their prices have fallen by up to 30% as demand for high-rise residences is still quite lethargic, with no signs of a recovery anytime soon.

The huge price correction can be attributed to a high percentage of investors and speculators in that market segment compared with the owner-occupier buyers.

Hence, there is a need to rein in speculation in our property market. Higher interest rates also signify confidence that the market will hold out well.

It will complement the move to reinstate the real property gains tax, albeit at a flat 5% for all property sales within the first five years of purchase.

Curbing excessive speculation will help prevent overheating in the market.

Property prices should be determined by actual demand and supply forces and not by artificial means.

KUALA LUMPUR: Standard Chartered Bank Malaysia Bhd has forecast the overnight policy rate (OPR) to gradually increase to 2.75 per cent by mid-2010, said managing director and chief executive officer Osman Morad.

Currently, interest rates stood at two per cent.

“We foresee a gradual rise in interest rates starting from the end of the first quarter this year,” he told reporters after opening its newly-relocated branch at Bandar Puteri in Puchong on Tuesday.

“I think Bank Negara has released their statement to make it very clear that they are concerned about growth and we will probably see a rise in OPR.(Based on) Our own internal forecast, we’ll see a possible two to three increases,” he added.

Meanwhile, Country Consumer Banking Head Tiew Siew Chuen said the bank hoped to upgrade, relocate and renovate 30 to 35 per cent of its premises over the next three years.

She said that it was part of the bank’s efforts to focus on customers’ needs and develop long-term relations with them by offering better banking experience.

Currently, the bank has 33 branches nationwide.

She said Standard Chartered Bank had lots of plans going forward to continuously upgrade its branches across Malaysia. – Bernama

KUALA LUMPUR: Bank Negara’s move to potentially raise interest rates in the near future should be viewed as a “normalisation” process, rather than an act of “tightening” monetary policy, said governor Tan Sri Dr Zeti Akhtar Aziz.

She emphasised the need for the markets to make a distinction between normalisation and tightening, pointing out that the significant reductions in interest rates implemented by the central bank last year were just an emergency position that the country had to take to avoid a fundamental recession.

“We need to look towards the normalisation of interest rates at some point. It should not be seen as tightening,” Zeti told reporters yesterday after a public lecture by Dr Abbas Mirakhor, the first holder of the International Centre for Education in Islamic Finance Chair.

Zeti voiced her concern that if interest rates were kept too low for too long, people would turn away from the conventional banking system in search of other instruments to enhance their returns on savings, and that could possibly involve them taking excessive risks without realising it.

“That could create a problem later on.

“We don’t want to wait for something to happen and then only take action,” she added, while pointing out that there was no sign of asset bubble forming or excessive leverage by consumers in the country yet.

“Borrowings of households are still at prudent levels,” she said.

On Tuesday, Bank Negara kept its overnight policy rate unchanged at a record low of 2%, but indicated that it could not keep the rate too low for a prolonged period as the local economy strengthened, otherwise, there would be a build-up of financial imbalances in the system.

The markets took that statement as a hint that the central bank would raise interest rates sooner than expected.

According to Zeti, the central bank could not tell when it would raise interest rates and by how much, but she said the monetary policy committee would continue to assess the prevailing economic trends to decide on the right quantum and timing to do so.

The next meeting of the monetary policy committee at Bank Negara is scheduled for early March.

“Anyhow, our stance is still to remain accommodative to support growth, especially in an environment where inflation is going to remain modest,” Zeti said.

The Government has targeted to hit a 5% gross domestic product growth this year, although the official forecast is for between 2% and 3% growth this year.

PETALING JAYA: Benchmark interest rates are set to gradually rise by 25 to 75 basis points before year-end after Bank Negara signalled its readiness to normalise interest rates in due course as a pre-emptive move to prevent the build-up of financial imbalances, say economists.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng said although the overnight policy rate (OPR) was maintained on Tuesday, the central bank had signalled its discomfort over holding interest rate too low and for a long period of time.

“As exemplified by the US subprime mortgage and housing market crisis, which some analysts attributed to overly low interest rates being stayed too long, loose monetary policies inevitably spawn overleveraging, excessive risk-taking and asset bubbles,” he told StarBiz yesterday.

At 2% currently, the OPR was lower than the average 2.5% to 2.8% seen in the year following the country’s most severe recession in 1998, he said.

“Depositors and savers are currently bearing the brunt of a low interest rate environment, which is aimed at spurring domestic demand,” he added.

With headline inflation or consumer price index turning positive in December, Yeah expected the upward adjustment to take place in the first quarter of this year, but the quantum would likely be gradual given that domestic demand was not expected to accelerate strongly as global economic recovery, especially growth in the advanced economies, remained sub-par and tentative.

“We expect a 25-basis point adjustment to bring the interest rate level to a more ‘normal’ level which we define as one that remains low and supportive of domestic financing and other economic activities,” he said.

However, he noted that the case for a 50-basis point hike was less compelling unless both domestic and external demand surged in the coming months.

“Nonetheless, a 50-basis point adjustment cannot be ruled out as a front-loaded measure to normalise the interest rate for the rest of the year,” he added.

Meanwhile, Malaysian Rating Corp Bhd chief economist Zahidi Alias noted that it was imperative that the quantum of any OPR hike take into consideration the growth of the economy relative to its potential output.

“One must bear in mind that at this juncture, policymakers might not be aggressive in hiking rates to ensure that the economy continues to pick up pace, and households do not become unduly burdened by heightened debt-repayment amounts,” he told StarBiz.

Nevertheless, if the economy persistently expanded more than its potential rate which the International Monetary Fund estimated to be around 4.25%, interest rate hikes were likely to happen to prevent the economy from overheating, Zahidi added.

Maybank Investment Bank Bhd (Maybank IB) chief economist Suhaimi Illias said in a note Maybank IB was prompted to revise its OPR forecast to a 50 to 75-basis point hike compared with no change previously following Bank Negara’s latest indication.

“Still, the expected magnitude of increase in OPR this year is less than the 150-basis point cuts between November 2008 and February 2009. This should still keep the monetary policy stance accommodative to spur private sector demand (consumer and business spending) as the Government aims to trim its deficit spending, hence public sector demand, in the medium term starting next year, to RM40.5bil (5.6% of GDP) from RM51.1bil (7.4% of GDP) last year, and eventually to -3% of GDP by 2015,” he said.

Meanwhile, Kenanga Research said although the sudden change in the central bank’s tone would likely be interpreted as a signal that it may soon raise rates, the research house believed that it generally reflected Bank Negara’s genuine concern and way of managing market expectations.

“The current unsettling global financial environment as well as the modest recovery trend outweighs any inflationary concern or unchecked asset bubble at the moment. Hence, we expect the OPR to be raised incrementally from mid-2010, from 25 to 50 basis points to 2.5% by year-end,” it said.

OSK Research in a latest update concurred that Bank Negara would hold interest rates steady till June in its efforts to boost liquidity as the Malaysian economy was still finding its footing with third quarter GDP still contracting at 1.2% and unemployment coming in at 3.6%.

“However, we do not discount a potential hike in interest rate in the second half of 2010 as the economy gains traction and inflation exerts its influence.

“Even if there is a hike, we believe it would be on a gradual basis, for example by 25 basis points per policy meeting, to ensure the sustainability of economic recovery,” it added.

CIMB Research also expects interest rates to be raised at a measured pace, and possibly sooner than expected in the first half of the year.

It has revised its OPR target for the year to 2.5% from 2% for 2010.

“As this will still be lower than the historical OPR since 2004, the rate move will not have a significant impact on demand,” it said.

PETALING JAYA: Financial institutions, in particular banks, have in general agreed to raise mortgage lending yields, which will have an impact of increasing their net interest margins (NIMs).

An analyst with OSK Research said banks with strong mortgage lending growth would be the key beneficiaries, while the eventual increase in benchmark interest rates would benefit all banks on a greater scale as loan assets tended to re-price faster than deposits.

He said higher home loan rates were imminent and expected housing loan rates to trend upwards in the not-so-distant future as the banking industry moved towards risk-based pricing in determining more sustainable interest rates for the industry.

The upswing in home loan rates is inevitable as economic conditions improve.

“The pricing war among banks earlier this year had brought housing loan interest rates to a level that was below or near the cost of funds and was not sustainable. With early signs of economic recovery, the rates are bound to increase,” he noted.

The average lending rate (ALR) rose to 4.91% in September from 4.9% in August. The current average base lending rate (BLR) is 5.51%. With home loan rates improving, OSK Research has maintained an “overweight” call on the banking sector.

“We are maintaining an ‘overweight’ call on the sector on the grounds that non-performing loans are likely to be benign.

“Meanwhile, the downtrend in provisions and strong capitalisation positions should provide future earnings and capital management upside surprises, which may not be fully reflected in banks’ valuations,” he said.

The analyst said the banking sector was currently trading at a mid-cycle price-to-book value of 1.68 times.

An analyst with HwangDBS Vickers Research also said mortgage rates needed to be increased to remove irrational price competition.

“Rate hikes are positive for banks,” he said, adding that for now, the price change would mainly affect the secondary property market, leaving the primary market unscathed.

“Pricing power depends on banks’ cost structure and incidences of default. We believe banks will price products based on risk,” he said, adding that margins were now extremely thin.

The analyst said banks were barely breaking even with irrational competitive pricing for mortgage products. “At BLR minus 2.4%, it effectively takes banks at least two to three years to break even. The BLR now stands at 5.55%, while average cost of funds for banks was about 2%.

“Taking into account implied costs set aside for credit default ranging from 20 basis points (bps) to 30bps, coupled with overhead costs (agent’s commission and fees) another 30bps, net yield gain on a mortgage loan was merely 1%.

“Rate levels are already at an all-time low. We believe it is a matter of time before rates pick up,” he noted.

The HwangDBS analyst said pricing power was within the perogative of the individual banks.

“Every bank will price products based on their respective cost structure and also incidences of default.

“While we agree that mortgage pricing has reached a level of irrationality, we believe banks will price products based on risk,” he said.

For instance, if a customer had a healthy credit profile, it was possible for the bank to offer him an attractive rate, he said, adding: “From our checks, we understand the pricing change affects the secondary market, while the primary market is left unscathed at this juncture.”

On the evolving banking landscape, the analyst said the overnight policy rate was anticipated to rise in the third quarter of 2010. This is in line with the stronger-than-expected growth (HwangDBS forecast of 5% versus official forecast of just 2% to 3%) as well as inflation trending toward 2.3% to 2.5% by July 2010.

“We are looking at 25bps in the third quarter 2010 and another 25bps in the fourth quarter. With the re-pricing of loans quicker than deposits, the impact would generally be positive on NIM,” he said.

The analyst said banks with positive impact on rate hikes were Hong Leong Bank Bhd and RHB Capital Bhd by virtue of their higher proportion of variable rate loans.

However, he said, Public Bank Bhd’s mortgage loan volumes might dwindle but the reseach house expected higher rates should more than neutralise this impact.

On the property sector, a HwangDBS property analyst said the rate hike had a double whammy. “The mass developers should not be adversely impacted due to resilient demand.”

However, with banks standardising mortgage rates and eliminating zero-entry cost packages for secondary market transactions, it will dent sentiment.

The analyst said the banks had agreed to end the mortgage price war. “We understand some banks have started to raise mortgage rates for new applications since this week.

“Mortgage rates have been standardised to BLR minus 1.8% from BLR minus 2.3%, while banks are no longer funding upfront costs such as legal fees and other costs.”

PETALING JAYA: Potential house buyers are still wary about making property purchases despite lower mortgage rates as the economic outlook remains uncertain, analysts said.

Average mortgage rates have fallen to about 3.5%, but at the same time banks have been more stringent on the approval of loans. The average mortgage rate is obtained from base lending rate (BLR) of 5.55% minus 1.5% to 2.4% for housing loans (or effective annual rates between 3.15% and 4.05%), depending on the amount and tenure of loans, and the package customers sign up for.

OSK Research said the attraction of lower mortgage rates had been superseded by fears of income security amid a deteriorating economic outlook.

“For those who are still financially sound, most would rather wait a while longer to snatch up better bargains a few more months down the road. Some are hoping for developers to come up with more creative and attractive perks and some are also waiting for prices to drop further, if any, before they are convinced to buy,” the OSK analyst told StarBiz.

The research house said downside risk for landed properties appeared limited compared to luxury condominiums, with the demand for landed properties expected to return by year-end.

“Most of the homebuyers in this segment are cash-rich and not highly leveraged. Given the accommodative interest rates today, any forced-selling or foreclosures of properties like the one we saw during the 1997/98 Asian Financial Crisis will be limited in this downcycle,” it said.

OSK Research expects the demand for luxury condominiums to decline by 30% to 40% in 2010 from 2008, with luxury condo prices already currently down by 15% to 20%.

An analyst from Kenanga Research agrees that the bearish economic outlook is making potential buyers hesitant about buying properties now.

“What if this (sign of market recovery) is just one-off data? What we need is for the sentiment to improve,” she said, noting that only 60% of bookings had been translated to actual sales compared to almost 100% previously due to more stringent loan requirements.

Jupiter Securities Sdn Bhd head of research Pong Teng Siew said that with the mortgage rates of 3.5% and effective cost of funds of 1.5%, banks net interest margin should be about 2% now.

“But cost of funds for smaller banks such as EON Capital Bhd, RHB Capital Bhd, AMMB Holdings Bhd are higher (slightly over 2%) because of higher interest bearing liabilities,” he told StarBiz.

A house buyer contacted by StarBiz said his current mortgage loan interest rate was 3.15% for the first two years and 3.45% for the remaining tenure.

He recently signed up for a 20-year conventional home loan from Alliance Bank Malaysia Bhd for the purchase of a double-storey house.

He is paying about RM1,700 per month for his RM300,000 loan.

His loan package included a one-time payment of RM2,500 for mortgage reducing term assurance, legal fees and stamp duty.

Other banks are offering similar mortgage rates.

For example, RHB Bank is charging BLR minus 2.1% for housing loans that range from RM250,001 to RM500,000, while Hong Leong Bank Bhd is offering BLR minus 2.2% for a RM300,000 mortgage loan.

Malayan Banking Bhd uses a property’s location as one of the criteria to determine interest rate, but is still offering rates in the region of BLR minus 2%.

All these banks have BLR of 5.55%.

Article: By K.C. LAW

Source: http://biz.thestar.com.my/news/story.asp?file=/2009/4/29/business/3793031&sec=business