KUALA LUMPUR (May 6): Banks' interest income margin (NIM) will be squeezed harder following Bank Negara Malaysia's (BNM) 50-basis point (bps) cut in the overnight policy rate (OPR) to 2%, a level last seen during the 2008-09 global financial crisis.

Some analysts are of the view that the compression might be less severe from the latest round of rate cuts, but thinner margins are still inevitable for the banks given the central bank's aggressive move in cutting rates.

BNM’s latest verdict did not come as a surprise, and the magnitude of the 50bps cut was in line with many economists’ expectations.

With the latest 50bps OPR cut, this means that BNM has cut a total of 100bps in the first five months of the year.  

Hong Leong Investment Bank banking analyst Chan Jit Hoong commented that banks’ NIM will definitely take a hit after the latest OPR cut. However, he expects the impact on the bottom line to be less severe this time around as fixed deposit (FD) repricing could be quicker.

According to him, about 80% of FDs will expire by June. Chan pointed out that most banks had saw the rate cut event coming and had been proactively managing their FD level to prevent exposure.

“From our sensitivity analysis, we estimate every 25bps cut in the OPR would see sector NIM contracting by 4-5bps and our profit forecast falling by 3-4% on a full year basis, without accounting for potential mark-to-market gains and lower defaults,” Chan said.

Chan opined that Alliance Bank Malaysia Bhd and BIMB Holdings Bhd would lose most, while Affin Bank Bhd and AMMB Holdings Bhd, which owns AmBank, were least affected.

Meanwhile, CGS-CIMB Research banking analyst Winson Ng estimated that banks under his coverage would face a steeper decline in net profit should a further 25bps OPR cut materialise.

“For the Malaysian banks under our coverage, we estimate that the 125bps OPR cut [in full-year 2020] would lower banks’ net profit by about 10% for 2020 [on a full-year basis],” Ng said in a research note.

Among the banks under coverage, Ng said that the earnings cuts were the smallest for three banks, namely AmBank, Public Bank and Affin Bank, due to lower floating-rate loan ratios of these banks.

“The average reduction in FY20-22F (forecast) net profit [is estimated to be] of 5% for AMMB (AmBank), 6.5% for Public Bank and 7.2% for Affin Bank.”

Meanwhile, MIDF concurred that BNM may reduce the OPR futher by 25bps due to the fact that US interest rates will be maintained at a low 0-0.25% level, which may provide ample room for BNM to have another rate cut. In addition, the low inflationary environment may also lend support to BNM’s decision.

In a separate announcement, BNM declared that banks may use Malaysian Government Securities (MGS) and Malaysian Government Investment Issues (MGIIs) to meet statutory reserve requirements (SRRs), effective May 16.

With the decision, BNM noted that there will be RM16 billion worth of liquidity to be released into the banking system. The SRR ratio remains unchanged at 2%.

When asked about the implications, MIDF banking analyst Imran Yassin Mohd Yusof commented that SRRs are more of a tool for liquidity, and he does not expect banks’ profit to be significantly impacted by such a measure.

He added: “Besides boosting liquidity, it is also hoped [by BNM] that this will induce more lending activities as the cash previously trapped could be used.”

In terms of share price performance, the banks have been beaten down year to date (YTD), registering double-digit losses ranging from 13% to 33%. To put into context, CIMB Group Holdings Bhd has fallen the most by 33.4% YTD to RM3.43, followed by BIMB which has dropped 26.82% YTD to RM3.22 and AMMB by 24.81% to RM2.94.