Banks on the rise.

BANK Negara Malaysia's latest rate hike has got investors all agog, if the FBM KLCI numbers are anything to go by. Among the big gainers are the banks. How will the increase in overnight policy rate affect them and which bank will likely benefit the most? WHEN Bank Negara Malaysia (BNM) raised its benchmark overnight policy rate (OPR) by 25 basis points to 2.25% on March 4, market reaction was quite unexpected.

Bursa Malaysia's key index, the FBM KLCI, actually jumped more than 30 points to 1,334 the week following the announcement.

The index - in which finance stocks account for nearly a quarter of its market capitalisation - has since retraced to around 1,300 points.

This was the first time the central bank had hiked its OPR after keeping it at 2% since April 2009. Basic finance tells us that interest rates and equity prices (as well as other asset classes) normally move in opposite directions. In technical terms, this is because a higher discount rate or cost of equity normally results in lower equity valuation.

Another reason why a rate hike is bad for the market is simply because it indicates that the cost of doing business will go up and hence squeeze profit margins of companies. Banks too are affected in that higher interest rates would lead to lower loan growth.

So, by pushing up the market, have investors got caught up in a mini stock price bubble and thrown caution to the wind? Anticipation of stronger economic growth Some analysts see this phenomenon as being caused by an increase in investor confidence. They feel market players are encouraged by fact that the central bank is now more confident of higher growth rates for the economy. This would push up the …