This article first appeared in Corporate, The Edge Malaysia Weekly, on July 18 - 24, 2016.

MALAYAN Banking Bhd (Maybank) and AmBank (M) Bhd were the first to lower their base rates following Bank Negara Malaysia’s unexpected move last Wednesday to cut the overnight policy rate (OPR) by 25 basis points to 3% in a bid to spur the economy. Most other banks are expected to follow suit, analysts say.

However, analysts are sceptical as to whether the potentially lower rates, which reduces costs for borrowers, will help stimulate loan growth for banks. As at May 2016, the banking industry’s loan growth had fallen to 6.2% year on year, its slowest pace since June 2007.

UOB Kay Hian Research banking analyst Keith Wee, for one, sees loan growth staying muted despite the lower rates. “Although lower rates should in theory stimulate [loan] growth, we believe the structural high household debt, property price-to-income affordability and poor consumer and business sentiments are likely to cap growth impact from such a mild rate cut,” he says in a report on the sector last Thursday.

The last time Bank Negara cut the OPR was in response to the 2008/09 global financial crisis. It slashed the OPR aggressively, by a cumulative 150bps between November 2008 and February 2009, over three cuts.

Back then, the move had a lagged effect on loan growth, with growth eventually picking up pace from under 10% to an average of 11% to 13%. This time around, a 25bps or even 50bps cut to the OPR is not likely to have a strong impact on loan growth, analysts say.

“We are of the view that the stimulus effect from interest rate cuts this time around is likely to be more muted, and that loan growth is unlikely to pick up meaningfully from current levels because the quantum of rate cuts this time around is not expected to be as aggressive as the 150bps cut back [then],” says Desmond Ch’ng, a banking analyst at Maybank Investment Bank Research.

In a July 14 report on the sector, Ch’ng goes on to say that he does not expect a significant pick-up in loan growth from the OPR cut this time around as the country’s household debt levels have crept up and are much higher today than they were before. The household debt-to-GDP ratio stood at 89.1% as at end-2015 compared with just 60.4% as at end-2008. With that, banks have gotten stricter with loan approvals.

“Not only have banks tightened their credit assessment processes but anecdotal evidence would suggest that the quality of borrowers has also waned, resulting in a steady decline in industry loan approval rates.

“[Additionally], loan-to-deposit ratios (LDR) are more elevated today at about 87.6% at end-May 2016 versus just 77.9% back in April 2009. Coupled with sluggish growth in deposits, banks will likely remain selective in their lending activity,” Ch’ng points out.

Top lender Maybank was, not surprisingly, the first of the local banks to announce a reduction in its base rate and deposit rates, just a day after Bank Negara cut the OPR. It lowered its base rate and base lending rate (BLR) by 20bps each to 3% a year and 6.65% a year respectively, effective July 15. It said its deposit rates would also be revised downwards by up to 20bps.

AmBank followed suit last Friday, saying it would lower its base rate and BLR by 20bps to 3.8% and 6.65% respectively from July 19. “This will not impact AmBank’s performance,” CEO Datuk Sulaiman Mohd Tahir said in a press statement, without elaborating.

A Bank Simpanan Nasional official told reporters last Thursday that it plans to reduce its base rate from 4.1% but has yet to decide when it will make the announcement.

Analysts say it is just a matter of time before other banks reduce their base rates too. “Maybank is normally the leader and once it has done it, the other banks would decide on their move,” one analyst remarks, explaining the highly competitive nature of the industry.

Banks will “undoubtedly” have to reflect the OPR cut in their interest rates, says Ch’ng. “But, in our view, this does not preclude them from eventually raising their base rates, especially for banks that have not done so [in recent months]. Arguably, this would be on the grounds that funding costs continue to be elevated, thus necessitating such a move, more so if deposit competition fails to ease,” he adds.

CIMB Bank Bhd, Public Bank Bhd and Hong Leong Bank Bhd had each raised their base rates by 10bps in recent months, prior to the OPR cut.

UOB Kay Hian’s Wee says he expects the overall base rates for most banks to trend downwards following the OPR cut. “But [they] may not match the 25bps reduction as long as the overall system deposit growth continues to be structurally weak, and hence, keeping competition for fixed deposits elevated,” he explains. Deposit growth in the banking system fell 1.6% year-on-year in May.

Most analysts say the OPR cut is expected to have only a marginally negative impact on banks’ earnings following a squeeze in net interest margins. “We estimate the average full-year negative impact to FY2017 net profit from the OPR cut to be -1.4% for banks in our coverage. The impact is estimated to be a larger -5.2% on Alliance Financial Group Bhd, given that it has the highest proportion of variable rate loans and a higher CASA (current account, savings account) ratio relative to its peers,” says Ch’ng.

The negative impact would be watered down for the three banks that recently raised their base rates, he says. In contrast, the impact could be marginally positive for AMMB (for its higher percentage of fixed rate loans and low CASA ratio) and Hong Leong Bank (for its low LDR), he adds.

The timing of Bank Negara’s 25bps cut in the OPR last Wednesday caught banks by surprise as most economists had expected the first cut in seven years to come only as early as September this year. The cut came following governor Datuk Muhammad Ibrahim’s second policy meeting since taking office in May.

He said the move was meant to keep Malaysia on a “steady growth path” as it sees more clouds over the global economy after Britain’s Brexit vote. Some economists think the central bank will likely lower the benchmark interest rate by another 25bps this year. Muhammad,  the day after the OPR reduction, told Bernama that it’s “not true” that there will be a series of rate cuts, saying the bank would keep an open mind at every policy meeting.  

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