CGS-CIMB: Banking sector to lose out from OPR cut

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KUALA LUMPUR (March 4): While the recent move by Bank Negara Malaysia’s Monetary Policy Committee to reduce the overnight policy rate (OPR) by 25 basis points to 2.5% is likely to benefit several sectors, the banking sector is a potential loser.

In a strategy note today, CGS-CIMB Research said the potential beneficiaries of the OPR cut include the property, automotive, and consumer sectors.

Commenting on the banking sector, the research house said the impact from the net interest margin squeeze on banks will overshadow potential interest savings for KLCI companies.

“As such, we roughly estimate that a 25 basis points cut in OPR rate could lower borrowing costs and lift our 2020F KLCI earnings estimate by 0.5% and KLCI by 8 points. We are keeping our KLCI target of 1,497 points (P/E of 15.5x or 2 s.d. below the three-year average P/E),” it said.

The research house said the 2.5% rate cut complements the RM20 billion economic stimulus package announced last week to mitigate downside risks to this year’s gross domestic product (GDP) growth.

“OPR cuts are positive for cyclical sectors such as property (top pick: Sime Darby Property Bhd), auto (top pick: Bermaz Auto Bhd), and consumer (top pick: Power Root Bhd) due to the increase in consumers’ disposable incomes. However, we do not expect the impact to be significant,” it said.

CGS-CIMB said the rate cut leads to positive impact for companies with high ringgit borrowings resulting in lower interest expenses.

It highlighted that the negative impacts for banks are because the downward repricing of lending rates has been wider than the decrease in deposit rates, leading to potential narrowing in the banks’ net interest margins.

“It is also negative for companies with high net cash balances as it will result in lower interest income,” it said.

At mid-morning on Bursa Malaysia, banking stocks drifted marginally higher, with Malayan Banking Bhd up 0.71% to RM8.47, CIMB Group Holdings Bhd up 0.44% to RM4.52, Public Bank Bhd adding 0.56% to RM17.86, RHB Bank Bhd gaining 0.89% to RM5.69, Hong Leong Bank Bhd up 0.26% to RM15.64 while AMMB Holdings Bhd added 0.55% to RM3.65.