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Thursday, May 9, 2019

OPR cut affects BIMB, Alliance Bank the most

Thursday, 9 May 2019
by ganeshwaran kana

PETALING JAYA: The profitability of banks in Malaysia will be negatively affected in the short term following the recent cut in the overnight policy rate (OPR), with banks with higher floating rate loans being impacted the most.

MIDF Research, which is cautiously optimistic on the banking sector’s outlook, said that banks would be hit by short-term pressure on their net interest margins (NIM). However, the impact on earnings is expected to be insignificant.

For context, NIM is a measure of the difference between the interest income generated by banks and the interest paid out to depositors.

“On average, we estimate a 3% decline in the earnings of banks under our coverage compared to our previous forecast. Banks with higher floating rate loans to be impacted the most.

“We believe that BIMB Holdings Bhd
image: and Alliance Bank Malaysia Bhd will see a higher drag on their earnings, as their floating rate loans comprise 91.0% and 89.9% of their loan books, respectively.

“Meanwhile, we expect a less muted impact on Malayan Banking Bhd
image: (Maybank) due to a more geographically diversified loan exposure, and Affin Bank Bhd due to less exposure in floating rate loans,” stated the research house in a note yesterday.

Affin Hwang Capital Research, meanwhile, expects the banking sector’s NIM pressure to gradually ease over the next six to 12 months, as the repricing impact of deposit rates takes effect.

“We estimate that banks may experience about a 1.4% to 3.9% full-year impact on the financial years of 2019 and 2020 net profit, on a pro-forma basis,” it said.

On May 7, the Monetary Policy Committee of Bank Negara reduced the OPR to 3% from 3.25%, on the back of macroeconomic headwinds and signs of tightening of financial conditions.

The central bank’s move to slash the key interest rate came in line with consensus expectations. Based on a Bloomberg poll, 14 economists among 23 respondents had predicted a 25-basis-point (bps) cut in the OPR.Despite the predicted margin compression in the local banking sector, MIDF Research said that “there is still room for investors to manoeuvre” by considering banks that have low exposure to floating rate loans, have a geographically diversified loan book and offer solid dividend yields.

“Applying these criteria, we opine that Maybank is a good candidate. We have a ‘buy’ call with a target price of RM11.40 for Maybank,” it said.

Maybank yesterday announced that it would cut its base rate (BR) and base lending rate (BLR) effective May 9.

Already offering the lowest BR and BLR in the country, Maybank would further cut its annual BR and BLR by 20bps to 3.05% and 6.70%, respectively, for both conventional and Islamic banking from today.

In line with the revision, Maybank’s fixed deposit rates would also be adjusted downwards by 20bps effective today.

In a statement, Maybank group president and CEO Datuk Abdul Farid Alias said: “Maybank has been offering the lowest BR and BLR among commercial banks in the country for some time now at 3.25% and 6.90% respectively.

“Our revision in rates will continue to benefit our borrowers who have loans pegged to the BR/BLR as their applicable interest rates will be adjusted downwards accordingly from May 9.”

He added that depositors would continue to receive an appropriate return as fixed deposit rates have been adjusted less than the 25bps decrease in the OPR. PublicInvest Research has recommended investors to accumulate banking stocks amid the earnings impact.

According to the research house, the longer-term effects caused by the OPR cut are likely to be shrugged off by gradual improvements in macroeconomic conditions.

“We see this as an opportunity to accumulate. While we maintain our ‘neutral’ view on the sector, it is with a positive bias, given the sector’s lagging valuations to the broader market.

“For sector exposure, we still like Alliance Bank Malaysia Bhd despite its potential near-term weakness, and CIMB Group Holdings Bhd
image: for its medium-term earnings growth story,” it said.

Meanwhile, Maybank IB Research said that the OPR cut would only have a marginal impact on loan growth, especially for banks that have raised their base rates this year.

Four of the eight domestic banks have already raised their base rates by 10bps this year, in light of higher funding costs. The four banks that have yet to raise the rates are Maybank, Public Bank Bhd
image:, Alliance Bank and AmBank.

“Loan application trends point to moderating loan growth in the coming months for on a three-month moving average basis, loan applications contracted 8.5% in March 2019, this being the fifth consecutive month of contraction.

“We maintain our 2019 industry loan growth forecast of 5.1% for now,” said the research house.

Maybank IB Research has maintained its “neutral call” on the banking sector, with “buy” calls on RHB Bank Bhd, BIMB and Alliance Bank.

In a separate note, AmBank Group chief economist Anthony Dass pointed out that there is a 40% chance of a second rate cut later in 2019 or early 2020, should the potential incoming data remain weak.

“Will Bank Negara institute another rate cut? Much would depend on the severity of the downside risks to growth from the heightened uncertainties in the global and domestic environment, trade tensions and extended weakness in commodity-related sectors.

“Another consideration will be if there is still evidence of a tightening in financial conditions even after a 25bps rate cut to 3% intended to preserve the degree of monetary accommodativeness,” said Dass.


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