Banks to see net interest margins, earnings compressed by 3% if OPR is cut again

Global growth is expected to slow to 3.2% this year amid escalating global growth concerns

by NG MIN SHEN / graphic by TMR

MALAYSIAN banks will see further compression of up to 3% in their net interest margins (NIMs) and earnings should Bank Negara Malaysia (BNM) cut the benchmark interest rate again this year amid escalating global growth concerns.

BNM last lowered the Overnight Policy Rate (OPR) by 25 basis points (bps) in May this year to 3%, citing “signs of tightening of financial conditions” in its first rate cut since July 2016.

Three months on, economists are beginning to lean towards a second OPR cut in 2019, over fears the US-China trade tensions will dampen growth.

Global growth is expected to slow to 3.2% this year, according to the International Monetary Fund’s (IMF) quarterly World Economic Outlook released last month.

This was the IMF’s fourth downward revision in nine months, with its April forecast of 3.3% growth already the lowest since the global financial crisis.

“If there’s another 25bps rate cut, banks will see NIMs compressed by another two to three bps over the next one to two quarters, before things normalise as loans are repriced, and fixed deposits mature and can be repriced.

“There will also be an average 3% drop in earnings for banks, although this depends on each bank’s percentage of floating rate loans in its portfolio,” MIDF Amanah Investment Bank Bhd analyst Imran Yassin Yusof told The Malaysian Reserve (TMR).

The US Federal Reserve (Fed) cut interest rates for the first time in 10 years and described the move as “mid-cycle adjustment”, indicating the cut was not the start of a sustained cutting cycle.

This was followed by US President Donald Trump’s tweet announcing 10% tariffs on another US$300 billion (RM1.26 trillion) worth of Chinese products effective Sept 1, 2019.

In retaliation, China devalued the yuan and stopped its purchase of US agricultural goods, leading the US to call China a currency manipulator.

“Before the escalation of trade tensions, we didn’t even think there would be any rate cuts. The probability for another cut has increased. We think if there’s another cut, it would potentially happen next year, (but)  now, it all depends on how bad the trade war becomes and whether it spills over into our domestic economy,” Imran Yassin said.

AmInvestment Bank Bhd analyst and senior VP of domestic equity Kelvin Ong, expects a second rate cut — if implemented — to hit banks’ net profits by about 2% to 3%.

The impact on lenders would be temporary, as deposits would be repriced upwards and eventually catch up with the lower lending rates.

“The chances of a second rate cut this year are looking higher at this moment. The Fed is a factor, plus other Asian central banks are also cutting their rates,” Ong told TMR.

If there is indeed a reduction, this would be the first time since 2011 that the benchmark lending rate would fall below 3%.

Between 2009 and 2011, Malaysia’s OPR hovered between 2% and 2.75% post-financial crisis.

The rate was first lowered in November 2008, by 75bps to 2.5% amid the immediate effects of the global recession.

CIMB Group Holdings Bhd group chief economist Dr Donald Hanna said on Tuesday, he predicts another 25bps rate cut within the next three to six months, on account of worsening trade conditions that are a blow to open economies like Malaysia, coupled with the high possibility of the Fed slashing its interest rates again next month to support growth.

Kenanga Investment Bank Bhd said the Fed’s recent rate cut decision was “unprecedented and unusual to say the least”, while markets are looking at another possible 25bps decrease before end-2019.

“Given Malaysia’s controlled inflation and a widening output gap, we believe BNM has the scope and room to cut interest rates if it requires to do so,” it wrote in a recent note.

Similarly, Malaysian Rating Corp Bhd (MARC) in a separate statement said there would be more room for an OPR adjustment — possibly in 2020 — if the Fed does cut its rates.

Hong Leong Investment Bank Bhd noted a 25% tariff on remaining trade with China (against the proposed rate of 10%) and a blanket auto tariff would lead to reduction of Malaysia’s GDP growth by -0.9% to -1.1%, with the impact of US-China trade accounting for half of that, based on BNM’s estimates.

“Hence, as the trade war between the US and China continues to prolong with the possibility of worsening relations, we now anticipate BNM to reduce the OPR by 25bps to 2.75%, the lowest since March 2011, as early as the November Monetary Policy Committee (MPC) meeting,” it noted.

After the OPR cut in May, MIDF Research said the average NIM of banks would come down by two to three bps for 2019 based on the 25bps downward revision.

“We noted that several banks have increased their base rates circa end2018 or in 1Q19 (on average by 10bps). Given the OPR cut, these base rates could revert to last year’s levels,” it wrote in a report.

BIMB Holdings Bhd and Alliance Bank Bhd would be hit hardest due to their large amounts of floating rate loans.