Earnings will drop temporarily if interest-rate reduction happens

Analysts expect any OPR reduction may dent earnings by much as 3%

By NG MIN SHEN / Pic By MUHD AMIN NAHARUL

A cut in the Overnight Policy Rate (OPR) will dent lenders’ earnings as shares of banks continue to be under selling pressure with billions of market capitalisation being erased from the lucrative sector.

Bursa Malaysia’s Financial Index slumped -7.87% in the last one year from a high of 18,519.95 to 16,822.07, while the main Kuala Lumpur Composite Index had lost 3.57% year-to-date to close last Friday’s session at 1,630.17.

Several main lenders have also been battered over earnings prospects as foreign investors dumped shares in these banks.

Analysts expect any OPR reduction may dent earnings by much as 3%, but interest income margins should recover once repriced depo-sits catch up.

Many economists and research houses are predicting that Bank Negara Malaysia (BNM) will slash the OPR by 25 basis points (bps) next month in view of a prolonged low inflation and the ugly prospect of domestic and global economic slowdown.

“Our house’s view is that there won’t be a change in the OPR as domestic demand is still strong. But if there is an OPR cut, we see the impact to banks’ earnings at circa 3% across the industry.

“There will be an immediate compression in banks’ net interest margins (NIMs) because their interest rates on loans will be repriced, while the rates on deposits will be adjusted later.

“As for how much compression — it will likely follow the rate cut, so if it’s a 25bps cut, margins will be compressed by around 20bps to 25bps,” MIDF Amanah Investment Bank Bhd analyst Imran Yassin Yusof told The Malaysian Reserve (TMR).

He said banks with greater exposure to floating-rate loans such as Alliance Bank Bhd will take a greater hit, while the likes of Malayan Banking Bhd (Maybank) and Public Bank Bhd will be less affected.

Timing-wise, the 3% impact on banks’ net profits will also depend on when the OPR cut — if any — takes place.

“If the OPR cut is done towards end-2019, for example, then the impact this year will be negligible. However, we expect that this compression will normalise eventually,” Imran said.

He said after BNM raised the OPR by 25bps in January last year to 3.25% from 3%, banks saw their NIMs jump in the first half of 2018 (1H18) before settling in 2H18.

“It’ll be the same this time. You’ll see NIM compression during the first six months of the cut, then as deposits catch up at better-priced rates, banks’ margins will recover or potentially improve even,” Imran added.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said while the effect of an OPR reduction depends on the quantum of the cut, as well as the timing, most banks will be able to weather the move.

“If it’s a 25bp reduction, it should be manageable as banks are also looking to expand their fee-based income. Lenders have also been venturing into digitalisation, which could reduce operating costs and gain better economies of scale,” Mohd Afzanizam told TMR.

More analysts have come forward to predict a change in the OPR very soon, following the US Federal Reserve’s increasingly cautious growth view and dovish monetary stance, in addition to concerns on the long-term sustainability of domestic demand as Malaysia’s economic driver.

BNM recently revised downward its GDP growth forecast for 2019 to between 4.3% and 4.8% against the Ministry of Finance’s bullish 4.9% projection. The central bank has also consistently warned of elevated downside risks to Malaysia’s growth, arising from global trade tensions, uncertainty in political and policy direction, and volatile commodity prices.

“Interestingly, after analysing each of BNM’s monetary policy statements since 2004, indication of heightened downside risks to growth has always preceded or coincided with a rate cut,” Kenanga Investment Bank Bhd said in a note last Thursday.

United Overseas Bank (M) Bhd last month said it expects the central bank to slash the OPR in May this year, while CIMB Investment Bank Bhd (CIMB Research) said a 25bp cut would drag banks’ net profits by 3.2% in 2020.

Alliance Bank and BIMB Holdings Bhd will be hardest-hit due to their high floating-rate loan ratio (over total loans) of 90.5% and 88.1% respectively expected for 2020.

A 25bp rate cut will shave 7% to 8% off Alliance Bank’s and BIMB’s net profits in the financial year 2020 (FY20). AMMB Holdings Bhd will see a 2.3% reduction in FY20 net profit as its floating-rate loan ratio is one of the lowest among its peers at 71.6% for FY20.

A rate cut will also have relatively lesser impact on Maybank and Public Bank as 42% and 7% of their loans respectively are based in the overseas markets and will therefore be unaffected by changes in Malaysia’s OPR, said CIMB Research.

The hike in Malaysia’s OPR last year was the first since 2014, with BNM calling global and domestic economic conditions “ripe” for a normalisation of interest rates. It also cited the need to curb risks arising from long periods of low-interest rates.

Prior to the raise, BNM’s last move was to cut the OPR to 3% from 3.25% in July 2016, a step aimed at protecting the country from global headwinds including Brexit.

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