by ASILA JALIL/ pic by TMR FILE
LOCAL banks will take a temporary hit on earnings from the recent cut in the Overnight Policy Rate (OPR) but should be well-cushioned by provisioning buffers built up in anticipation of more rate cuts amid the Covid-19 pandemic.
Lenders with a higher proportion of cheap deposits may benefit from the lower OPR as it enables them to offer lower financing rates, Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid (picture) said.
This also allows banking institutions to maintain their net interest margin (NIM) or net income margin at a reasonable level.
“An OPR cut can be negative, but it is only transitory as when banks’ deposits mature, new rates will be applied and NIMs should normalise thereafter,” he told The Malaysian Reserve.
Lenders should also ensure they have enough non-interest income — or non-fund-based income for Islamic banking — to make up for the impact when the OPR is slashed.
“Banks’ holdings in marketable securities such as bonds and sukuk will benefit when there is a declining interest rate as the interest rate and bond prices are inversely related,” Mohd Afzanizam said, adding that the gain in marketable securities would improve banks’ non-interest income.
On July 7, Bank Negara Malaysia (BNM) reduced the benchmark lending rate for the fourth time this year by 25 basis points (bps) to 1.75% due to concerns over weak economic conditions caused by the pandemic. The OPR cut provides additional policy stimulus to accelerate the pace of economic recovery, BNM said.
In a recent research note, MIDF Research said it’s staying neutral on the banking sector as the OPR cut was widely anticipated given the current situation of the Covid-19 pandemic as well as the expected economic fallout.
While a reduced OPR usually shrinks banks’ earnings, the effect of the recent reduction is likely to only be minimal as banks would have adjusted their pricing and strategy given the state of the economy.
The relaxation of regulatory requirements such as the Liquidity Coverage Ratio and Net Stable Funding Ratio also lessens the pressure on banks’ NIMs, MIDF Research said.
Depositors may be unwilling to lock in deposits for the longer term and prefer to utilise current account and savings account, for now, it added.
Meanwhile, AmBank Research expects banking sector NIM to compress by 13bps on average for the year. Every 25bp reduction in the OPR is expected to impact most banks’ NIM by 2bps to 4bps while their net profit will be narrowed by 1% to 3%.
“Arising from the dovish statement, we have input another 50bp rate cut into our earnings of banks for 2020. This included the 25bp reduction which has just been announced, bringing to a total of 150bp rate cut factored into our estimate for banks’ earnings in 2020.
“We expect a further rate cut of 25bps in the second half of 2020,” it said.
The research house is neutral on the industry, based on concerns over upticks in loan impairments after the six-month loan moratorium ends in September.
It added that Alliance Bank Malaysia Bhd is the most affected by the rate cut (due to its high percentage of variable rate loans), followed by Bank Islam Malaysia.