KUALA LUMPUR (March 28): Although Bank Negara Malaysia (BNM) said any adjustments to the overnight policy rate (OPR) do not suggest that there are risks to domestic economic growth, it is likely to be negative for overall KLCI earnings, said CIMB Research.

The OPR has remained unchanged at 3.25% since January last year.

Yesterday, BNM governor Datuk Nor Shamsiah Mohd Yunus told reporters at the release of the central bank's Annual Report 2018 that the rationale of OPR cut, should there be any, is not necessarily meant for stimulating economic growth.

Yet economists have not ruled out the possibility for an interest rate cut by BNM in its upcoming Monetary Policy Committee (MPC) meeting on May 7 after Malaysia recorded deflation for the second consecutive month. The consumer price index (CPI) fell 0.4% in February from a year earlier, which was led by a drop in transport cost.

In a strategy note dated March 27, CIMB Research's Ivy Ng said that overall, she was of the view that a 25-basis-point OPR cut may be a short-term positive for the market from a sentiment perspective.

"However, it is likely to be negative for overall KLCI earnings, as the impact from the net interest margin squeeze on banks appear to be higher than potential interest savings for KLCI constituent companies.

"This is because the net gearing of KLCI constituent companies (excluding banks) is only around 31%, and roughly 55% of their borrowings are denominated in foreign currencies," she said.

Ng explained that OPR cuts are positive for cyclical sectors such as property, auto and consumer due to the increase in consumers' disposable income; however, the impact is not expected to be significant. Similarly, a rate cut is also positive for companies with high ringgit borrowings as it will result in lower interest expense, it said.

On the other hand, Ng said an OPR cut is negative for banks, as the downward re-pricing of lending rates had historically 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.

"Based on the above, we roughly estimate that a 25bp cut in base lending rate (BLR) could lower our market earnings estimates by 1% and our KLCI target of 1,638 points by 15 points. We are keeping our top three picks of Dialog Group Bhd, Astro Malaysia Holdings Bhd, and Malaysian Pacific Industries Bhd," she said.