US rate hike puts Malaysian banks' bond portfolios in spotlight

KUALA LUMPUR: The US Federal Reserve's 25-basis-point rate hike puts Malaysian banks' bond portfolios under scrutiny as higher global yields threaten to erode fixed-income valuations.

The unanimous move - the Fed's first rate increase since 2023 - has already been reflected to some extent in Malaysia, according to Kenanga Research.

The firm said Malaysian Government Securities (MGS) yields have remained elevated and moved closely with US Treasury yields.

At current yield levels, Malaysian banks could face negative revaluation on their fixed-income securities portfolios in the third quarter (Q3) of 2026.

However, Kenanga Research expects the pressure to ease in Q4 as MGS yields potentially improve.

The KL Financial Index has already fallen more than two per cent since end-August, suggesting that part of the earnings risk, estimated at around three per cent, has been priced into bank valuations.

In the near term, Kenanga Research favours banks with relatively lower exposure to bond-market swings namely Malayan Banking Bhd (Maybank), Hong Leong Bank Bhd (HLB) and Alliance Bank Malaysia Bhd.

This preference is tactical, particularly against AMMB Holdings Bhd and CIMB Group Holdings Bhd, which are relatively more exposed to fluctuations in fixed-income valuations.

Beyond the immediate bond-market impact, the underlying fundamentals remain important, Kenanga Research said.

Banks that can maintain good control over their cost of funds should be better positioned to capture healthy loan growth.

This supports Kenanga Research's longer-term view on Maybank and HLB.

The firm currently expects Bank Negara Malaysia's overnight policy rate to remain unchanged.

The broader market, however, remains underpressure from elevated bond yields and oil prices.

With the FBM KLCI already down nearly three per cent in September, Kenanga Research said investors may increasingly look towards defensive sectors such as healthcare, while REITs and selected oil-and-gas names could offer alternative opportunities.