OPR cut will compress banks’ earning margins

Some banking stocks fell yesterday following the central bank’s remark on having ample space for another OPR adjustment

By ASILA JALIL / Pic By TMR File

THE banking industry will be marginally impacted if Bank Negara Malaysia (BNM) moves to slash the Overnight Policy Rate (OPR) in a bid to shore up economic growth.

AmBank Group chief economist and head of research Dr Anthony Dass (picture) said although the impact would be short term, it will put mild pressure on the sector’s earning margins by 1% and 3%, while the impact on most banks’ net interest margin will be between two and four basis points (bps), for every 25bps points cut in the OPR.

“This is as the repricing of deposits to lower rates will eventually catch up with the drop in lending rates.

“However, the silver lining to this is the aforementioned potential unrealised mark-to-market gains on bonds, as well as realised gains from any sale of securities benefitting from the decline in yields,” he told The Malaysian Reserve (TMR) yesterday.

A further OPR cut could be made in March this year subjected to the development of the Covid-19 outbreak, and domestic and global challenges to the economy, he said.

“Lowering the policy rate will provide some breathing space to the people as it will lower their borrowing cost, especially on flexible loans. On that note, it will help ease the risk of loan defaults.

“At the same time, the extra money earned from lower borrowing cost is likely to entice people to take advantage of the low rates and purchase items like cars, properties and others,” added Dass.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said banks will initiate adjustments in variable rate financing, while deposits rate adjustment will only occur when the term matures.

“Over time, it will normalise. Despite this, the banks can always leverage on the fee-based income to cushion the impact,” he told TMR.

He said BNM is forecast to cut the OPR by 25bps in May as the central bank would want to assess the impact of the fiscal stimulus package which is to be announced by the government.

Finance Minister Lim Guan Eng recently said the announcement on the stimulus package would be made either at the end of this month or early March.

On Wednesday, BNM governor Datuk Nor Shamsiah Mohd Yunus said the central bank has ample room to adjust the OPR to accommodate the challenges in the economy following the slowdown of the economic growth to 3.6% in the fourth quarter of 2019 (4Q19).

Mohd Afzanizam added that the central bank has the space to reduce the OPR as economic growth is expected to be lower in the near term, while inflation is likely to remain low.

“The Covid-19 outbreak is quite serious given China is the most badly impacted country and the world has become so integrated in terms of supply.

“So, the supply shock following the virus outbreak is expected to have a ripple effect in the future,” he added.

Meanwhile, Socio-Economic Research Centre ED Lee Heng Guie said despite having ample space for a cut, the central bank, however, has to assess the fiscal stimulus package before it decides to slash the OPR.

He said the impact of the virus outbreak could end by the 1Q or 2Q this year and there might not be a need to cut the OPR if the stimulus package could mitigate the risks of the outbreak.

“This impact could be very short. It could only be for one quarter or most two. If they (BNM) need one more round of cut, they have to make more assessments while waiting for the government to roll out the package,” he said.

BNM made its first OPR cut this year in January, lowering the rate by 25bps points to 2.75%. Prior to that, it was lowered to 3% from 3.25% in May last year.

Some banking stocks fell yesterday following the central bank’s remark on having ample space for another OPR adjustment.

CIMB Group Holdings Bhd’s share price fell 1.41% or seven sen to RM4.88, while Hong Leong Bank Bhd dropped 1.94% or 30 sen to RM15.14.