Further OPR cut, bad loans likely amid political, economic uncertainty


CAUGHT in the tide of political and economic uncertainties, the banking sector is set to weaken throughout the year on a likely further cut to the Overnight Policy Rate (OPR) and increasing loan defaulters.

“Given a more subdued economic outlook in 2020, our loan growth target remains unchanged at 3%, while not discounting the possibility of a further increase in the system impaired loans as sentiment deteriorates,” Affin Hwang Investment Bank Bhd (Affin Hwang Capital) wrote in a note yesterday.

Key sectors driving the country’s system loan growth include household loans (primarily residential properties and credit cards), as well as the manufacturing, construction and wholesale/retail sectors.

A second cut in the benchmark interest rate is also possible this month, Hong Leong Investment Bank Bhd said.

“In Malaysia, we opine that uncertainty remains as political priorities may continue to shift. We expect Bank Negara Malaysia (BNM) to reduce the OPR by 25 basis points (bps) in the first half of 2020, as early as March 2020,” it said in a research report yesterday.

BNM slashed the OPR by 25bps in January this year. Economists foresee BNM’s Monetary Policy Committee (MPC) to reduce the OPR again at its meeting today, although some are anticipating the cut to come only later in the year.

Net financing growth across the country moderated to 4.7% in January this year from 5% in December 2019, due to a stagnant outstanding corporate bond growth of 8% amid high redemptions, BNM said in its monthly highlights recently.

Net financing refers to outstanding loans of the banking system, excluding development financial institutions and outstanding corporate bonds.

Outstanding business loan growth slowed to 2.5% in January from 3.3% in December 2019, on account of higher repayments during the month.

Disbursement levels were also lower following chunky disbursements in the manufacturing and agriculture sectors in December last year.

Outstanding household loan growth was sustained at 4.5% in January, with broadly unchanged contribution to growth by purpose.

Inflation increased to 1.6% in January versus 1% the month before, mainly reflecting the base effect of fuel prices. Core inflation was also higher at 1.7%, partly reflecting larger price increases in some transport services, recreational services and miscellaneous items.

Meanwhile, the overall Industrial Production Index grew at a slower annual rate of 1.3% in December 2019.

Manufacturing sector growth improved to 3.4% in December 2019 from 2.7% in the previous month. Investor sentiment remained affected by external factors in the first month of 2020, as caution prevailed following uncertainties over the potential economic impact from the outbreak of Covid-19.

“These uncertainties contributed to a mixed performance in the domestic financial markets. The higher investor risk-aversion led to a broad-based decline in regional equity indices, including Malaysia,” BNM stated.

Consequently, the FTSE Bursa Malaysia KLCI declined by 3.6% to close at 1,531 points as at end-January.

The domestic bond market, however, remained supported by non-resident inflows amid easing monetary conditions and positive developments on global trade negotiations.

“The 25bps cut in the OPR led the 10-year Malaysian Government Securities yield to decline by 18bps. This confluence of factors led the ringgit to appreciate by 0.1% against the US dollar during the month,” BNM added.

Affin Hwang Capital maintains a neutral stance on the banking sector, with projections for a contraction in sector core earnings of 1.8% year-on-year in 2020 and flat growth in 2021.

Based on the research firm’s forecasts, the industry is currently trading at a 2020E price-to-book value multiple of one time versus the past 10-year average of 1.53 times and past five-year average of 1.35 times.