Slower loan growth despite lower OPR

Demand for loans would also be curtailed as consumers and businesses refrain from ‘big-ticket financial commitments’


BANKS are expected to see slower loan growth in the near term despite Bank Negara Malaysia’s (BNM) recent move to slash its policy rate for the second time in three months, as uncertainties in the current environment keep consumers at bay.

The actual impact from the Overnight Policy Rate (OPR) cut typically takes up to 12 months before actual growth can be felt in the economy, OCBC Bank (M) Bhd economist Wellian Wiranto said.

Demand for loans would also be curtailed as consumers and businesses refrain from “big-ticket financial commitments”, especially if there are uncertainties.

“Hence, despite the OPR cut should translate into lower borrowing costs overall, we might see a slower than usual uptick in loans growth. In short, the OPR cuts would help cushion the blow, but the pain will still be felt,” he told The Malaysian Reserve (TMR).

He also expects BNM’s Monetary Policy Committee to make another OPR cut when it meets again in May, although this largely depends on the global currency front and whether things would remain stable enough for the central bank to make the move.

The OPR was slashed by 25 basis points (bps) to 2.5% earlier this month as a pre-emptive action against the Covid-19 outbreak, bringing the OPR level to its lowest since 2010.

It was the second rate reduction this year, after the central bank reduced the OPR to 2.75% from 3% in January.

Conversely, MIDF Amanah Investment Bank Bhd (MIDF Research) senior analyst Imran Yassin Yusof believes loan growth could be supported by lower lending rates as a result of the lower OPR, although the rate reduction will affect banks’ net interest margins (NIMs).

“This is due to the fact that the affordability threshold of potential borrowers could be lower as well. However, we do not expect a big rise in loan growth due to the current cautious climate,” he said.

Another 25bps cut in the OPR may also be possible in May following the recent oil price slump, Imran added.

It could take up to two quarters for lenders’ NIMs to normalise, MIDF Research said in a recent report.

With the recent cut, NIMs could compress by 10bps on average or circa 6% to earnings estimates.

“However, this is predicated that the OPR reduction was a surprise one. Since the Jan 20 OPR cut may have been largely anticipated, the impact could be muted.

“Furthermore, we posit that banks may have also anticipated a second OPR cut this year. In combination with the possibility of slower pace of fixed deposit accumulation, impact of the OPR cuts could be subdued still,” it said.

The central bank may also opt to reduce the statutory reserve requirement (SRR) as an alternative to support growth under current circumstances, as the country battles the second wave of Covid-19 and the new political landscape.

An SRR cut by 50bps seems more likely after two OPR cuts this year, AmInvestment Bank Bhd chief economist Dr Anthony Dass said.

“With oil prices down and the ringgit weak, it may not be conducive for a rate cut just yet. In fact, those countries experiencing weaker currencies may have to put on hold their decision to reduce rates in a move to support growth as it can have more upside to their currencies,” he told TMR.

A 50bps reduction in the SRR would be able to inject approximately RM8 billion to RM9 billion of additional liquidity into the financial system, he added.

The additional funds should be channelled into “special investment” and be used to support small and medium enterprises.

“Such a mechanism will result in a more effective outcome from the cut. In this respect, the SRR can go as low as 1%,” Dass noted.

As for the OPR, he said it could be reduced by another 50bps to 75bps from the current level if the ringgit stabilises with low inflation levels of around 1% to 1.5%.