PIBB anticipates stronger pick-ups in loan demand to mitigate longer-term impacts of the rate cut
by SHAZNI ONG/ pic by MUHD AMIN NAHARUL
BANKS are expected to experience pressure on their net interest margin (NIM) for the next two quarters due to the immediate re-pricing effects of the variable loan rates following the cut in the Overnight Policy Rate (OPR) by the central bank on Wednesday.
Affin Hwang Capital in a note yesterday said the reduction of 25 basis points (bps), however, is not material on the overall banks’ bottom lines on a full-year basis.
“NIM will likely start to normalise in the third quarter of 2020 (3Q20) as the downward re-pricing of deposit rates takes effect. We estimate banks may experience a -1% to -5.8% impact on their respective FY20E-FY21E net profits,” the broking firm said.
Among the banking stocks, the firm expects Alliance Bank Bhd, RHB Bank Bhd and CIMB Group Holdings Bhd will bear a larger negative impact on their earnings due to their more asset sensitive balance sheets.
Malayan Banking Bhd (Maybank) reduced its Base Rate (BR) and Base Lending Rate (BLR) by 25bps effective today, in line with the recent reduction in OPR rate.
Its BR will be lowered from 3% per annum (pa) to 2.75% pa, while its BLR will be revised from 6.65% pa to 6.4% pa the bank stated yesterday.
Similarly, the Islamic BR and Base Financing Rate will be reduced by 25bps from 3% pa to 2.75% pa and from 6.65% pa to 6.4% pa respectively.
Maybank’s deposit rates will also be adjusted downwards by 25bps effective the same day.
The last revision in Maybank’s BR was on May 17, 2019, when it was revised to 3% from 3.25%, days after the central bank had cut the OPR then.
MIDF Research in a note yesterday said banks’ margin compression is expected in the short term and normalisation could be quick as was the case after the May 2019 OPR cut.
The research firm maintained its “positive” stance in the banking sector noting that the banks could have anticipated the rate cut and would have likely manoeuvred early.
“This is suggested by the rebound in NIM in one quarter (3Q19) and tepid growth in fixed deposits,” the firm said, adding another OPR cut would have already been priced in but banks remain undervalued.
Public Investment Bank Bhd (PIBB) said, while the OPR cut will be negative sentiment-wise to the sector, earnings-wise impact though could be relatively marginal. “Given the most recent rate cut was only a year ago, with banks not having altered their portfolios significantly in that time, profits are estimated to take a circa 3% hit full-year effect on a businessas-usual basis, not accounting for growth factors.
“Banks could revise lending and savings rates lower by circa 20bps in the coming days, similar to the May 2019 cut,” it said.
PIBB anticipates stronger pickups in loan demand to mitigate longer-term impacts of the rate cut, with gradual improvements on the macro front coupled with an even lower borrowing rate.
“While we maintain our neutral stance on the sector, we still suggest selective exposure to the sector given lagging valuations to the broader market. For sector exposure, we like AMMB Holdings Bhd and CIMB for their earnings growth stories,” it added.
Hong Leong Investment Bank Research (HLIB) said the impact from the rate cut should be less profound vis-à-vis May 2019’s reduction since banks have already priced in the expectations.
“We noticed deposits growth have tapered due to tepid fixed deposits built-up as banks deliberately managed these lower to prevent overexposure ahead of the OPR cut. Hence, we believe NIM recovery will also be quicker.
“From our sensitivity analysis, we estimate every 25-bps cut in the OPR would see sector NIM contracting by 3bps-4bps and our profit forecast reduced by 2%-3%,” the firm said, adding that Alliance Bank Malaysia Bhd and BIMB Holdings Bhd would lose most, while Affin Bank Bhd and AMMB are least affected.
HLIB maintained its ‘Neutral’ call on the sector also said the OPR cut in the early part 2020 will help to remove one major share-price overhang on the brighter side of things.
Looking ahead, the firm’s economics team is staying pat on their OPR outlook for 2020 unless the global economy deteriorates, and causes a negative spillover to Malaysia.
“Now, banks can better plan to improve NIMs for the subsequent three quarters of 2020. However, the growth outlook for banks is still modest.
“We draw comfort from the sector’s cheap valuations as it is trading near -2SD to its five-year average price-to-book value,” it said.
The firm’s preferred pick is Maybank (target price: RM9.05) given its good dividend yield and low foreign shareholding level versus larger domestic peers.