Margin compression expected in the short term following OPR cut

THE banking sector will experience margin compression following the 25 basis points cut in the Overnight Policy Rate (OPR) to 2.75%  by Bank Negara Malaysia yesterday, analysts say.

MIDF said the cut will have a negative impact on banks’ earnings from downward pressures in terms of net interest margin (NIM) compression. This is due to the fact that there will be a near-immediate downward adjustment to loans and financing which have a floating rate, while term deposits (such as fixed deposits) are re-priced after maturity. The floating rate loans, on average, contributed circa 78.9% of the total loan book of banks under its coverage as at end-September, 2019.

However, the research firm said normalisation could be surprisingly fast. Under normal circumstances, it will take two to three quarters for the NIM to normalise due to cost of funds decreasing, in particular from adjustments to the fixed deposit rates which had been contracted before the OPR cut. However, MIDF said the OPR had been expected by bank managements and they could have already acted accordingly.

This was evident from the subdued deposit competition observed in 4QCY19, as banks would have avoided locking in deposits at higher rates. As such, MIDF anticipates that NIM normalisation could be much faster. 

It added that the impact from another rate cut could be muted. Taking into consideration the previous trend that it  had observed, the impact of the OPR cut yesterday will likely be muted to banks’ full-year net income and earnings. In its view, it will probably be less than the previous estimate of an average decline of -3% to the banks’ earnings forecast.  

In addition, less intense deposit competition will likely continue. The requirement to meet the Net Stable Funding Ratio (NSFR) as prescribed by BNM played a key factor in banks accumulating deposits in CY18 and early CY19.

One of the possible upsides from the OPR cut could be a boost to loans growth with the lower rates supporting loan demand. However, MIDF said there would not be a steep upswing in demand as loan affordability will continue to be a determinant.

MIDF said the majority of the banks are trading below their three-year historical averages.  It added that this is not justified given that banks have thus far managed to navigate the headwinds and will continue to do so. “In addition, we have not yet observed any significant negative earnings surprise nor are we expecting it in the short term.”

MIDF is positive on the banking sector. Its top picks are  Maybank (buy, TP: RM10.30), CIMB (buy, TP: RM6.30) and RHB Bank (buy, TP: RM6.35).

Meanwhile, AllianceDBS said the timing of the OPR cut was unexpected as it had anticipated it at the end of 1Q20. It added that while the cut implies better affordability and potential alleviation of asset-quality concerns, it remains to be seen if this move would spur loan demand. It noted that the previous rate cut last year did little to alter loan growth momentum.

At 12.30pm today, Maybank was down two sen from yesterday’s close at RM8.53, CIMB was up two sen to RM5.05 while RHB Bank declined one sen to RM5.83. – Jan 23, 2020


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