KUALA LUMPUR (July 8): Bank Negara Malaysia (BNM)’s move to trim the overnight policy rate (OPR) by another 25 basis points (bps) — Malaysia’s fourth rate cut this year — did not take the banking sector by surprise as it was widely anticipated, according to research houses.

MIDF Research said the impact of the OPR cut on banks’ net interest margin (NIM) will likely be muted based on three factors, including the fact that most financial institutions may have already adjusted their pricing and strategies accordingly, in anticipation of the rate cut.

“This is also due relaxation of regulatory requirements, such as the Liquidity Coverage Ratio and Net Stable Funding Ratio, which means there is less need for banks to fight for deposits. [Also], depositors may be unwilling to lock in deposits for longer term and prefer CASA (current account savings account) for now,” it said in a note today.

According to Kenanga Research, some banks had recently guided that the impact of day one modification losses would not be as severe as initially estimated. The firm also noted that investors are largely looking ahead to 2021.

“We do not expect the market to react too negatively to yesterday’s OPR decision nor expectations of yet another rate cut. Banks’ NIMs have already been adversely hit by the earlier 100bps cut and the upcoming impact from day one modification losses will have a further lumpy impact on margins.

“In addition, we believe we are now closer to the end of the rate cut cycle and experience suggests that this would be positive for share price performance,” it said.

In view of the weak macro environment, Hong Leong Investment Bank (HLIB) Research pointed out that the OPR cut was well within industry expectations.

Based on the firm’s sensitivity analysis, HLIB estimated every 25bps OPR reduction would see sector NIM contracting by four to five bps with the research house’s profit forecast falling by circa 4% on a full year basis, without considering potential mark-to-market gains and lower defaults.

“We assumed a symmetrical 25bps rate cut for both variable loans and non-CASA deposits while all other factors were held constant. Also, we used group figures in our analysis. Hence, for banks with sizable overseas operations, the actual impact is likely to be lower than our calculations,” it added.

HLIB, Kenanga and MIDF each has a “neutral” call on the banking sector, citing, among others, the re-opening of the economy and significant rate cuts having helped clear some overhang for the industry and near-term Covid-19 related headwinds being balanced out by the sector’s deflated valuations.

Meanwhile, Affin Hwang Capital said it does not expect a strong pick-up in lending activities despite the latest OPR cut, due to weak consumer demand, which may lead to a scale-down and deferment in business capital expansions.

The firm expects system loan growth may likely decline by 1% in 2020 versus a year-on-year increase of 3.9% in 2019.

“Based on our estimate, an additional 25bps rate cut will potentially result in a sector net profit decline of 2.5% in 2020, a half-year impact from July to December, and a decline of 1% in 2021 under a normalised full-year impact, with deposit rates already repriced down.

“Banks with more asset-sensitive balance sheets, namely those with higher proportion of variable-rate loans against fixed rate loans in their portfolios, may see more adverse net profit impact over the next six months such as CIMB Bank Bhd and Alliance Bank Malaysia Bhd,” it said.

The research house has maintained its “underweight” call on the sector, as it does not think that the banking sector is completely out of the woods yet.

Yesterday, BNM cut its OPR by 25bps to a record low of 1.75%, saying that the impact of the Covid-19 pandemic on the global economy is severe and that Malaysia’s economic activity contracted sharply in the second quarter of the year due to measures introduced to contain the pandemic.

The central bank, in a statement, said Malaysia’s inflationary pressures are expected to be muted in 2020.

"The impact of Covid-19 on the global economy is severe. Global economic conditions remain weak with global growth projected to be negative for the year. For Malaysia, economic activity contracted sharply in the second quarter of the year, due to measures introduced to contain the pandemic globally and domestically,” it said.

Including the latest OPR cut, BNM has slashed the key interest rate four times so far this year for a cumulative 125bps reduction.

On Jan 22, BNM cut the OPR by 25 bps to 2.75% followed by another 25bps reduction on March 3 to 2.5%. On May 5, BNM slashed the OPR by 50 bps to 2.00%.