BANKS are enjoying a honeymoon period of an upward interest rate cycle while increased company failures and bad debts will only strike the industry at a later stage as the cycle moves on, says Robert Kenrick, partner in KPMG Peat Marwick.
Contrary to a widespread belief that interest rate increases would automatically hurt banks' profitability, Mr Kenrick said yesterday the institutions were actually benefiting from the early phase of an interest rate rise.
''Higher interest rate is a boost to their profits as they earn more on their shareholders' fund and non-interest bearing liabilities,'' he said.
He estimated that higher earnings on the interest-free shareholders' fund would furnish banks with an extra three per cent profit.
Although banks will incur higher interest expenses on deposit accounts, the relatively small amount of deposits governed by the interest rate rules of the Hong Kong Association of Banks means it will not be a heavy financial burden.
''The extra expense does not make a lot of difference to banks' profit in 1994,'' Mr Kenrick said.