The decision to cut the OPR by 50bps fell in line with our as well as the market’s expectation. The amount of the OPR reduction is seen as justifiable as we expect the economy to be in the contraction region in the first half of 2020 as it is impacted by the virus attack and the containment measure of the MCO.

Low borrowing costs, added with fiscal stimulus plus the gradual easing of the MCO should see a gradual recovery in 3Q2020 with further improvement in 4Q2020. Hence the possibility of another rate cut although is on the table will depend much on how the economy crafts out in 2H2020. If the downside risk is low, then there is less room for another rate cut.

Meanwhile, the use of MGS and MGIIs for SRR is seen as positive. It will help to ease liquidity issues given the current uncertain environment. With the SRR ratio maintained at 2%, and the use of MGS and MGIIs as part of SRR compliance, it would release an additional RM16 billion in liquidity into the financial system. It also bodes well for the bond market as we expect more issuances to finance the fiscal stimulus, projected at RM145 billion.

Also, it should help banks as they shoulder the burden of the loan moratorium and face the potential risk of rising NPLs. With the rate cut, banks’ NIMs (net interest margins) will be further compressed as well. Hence, the 50bps cut should see both NIMs and earnings to be impacted by 4–8bps and 2–6%, respectively.

• The decision to reduce the OPR by 50 basis points by Bank Negara to 2.00% fell in line with our and the market’s expectation. With this cut, the cumulative interest rate reduction thus far in 2020 amounts to 100 basis points. The decision to cut rates is to help cushion the downside risk on growth where a sharp contraction is expected in 1H2020 from the coronavirus that has resulted in the movement control order (MCO).

• Nevertheless, with the fiscal stimulus measures, the easing of the MCO and the gradual improvement on the global front in 2H2020 should see the economy slowly come out of the woods. Lower interest rates would potentially entice consumers to return to the market and purchase items like property and automobiles although the number of transactions may not be significant in 3Q2020. However, as the confidence level improves, pent-up demand is expected to pick up.

• Possibilities for more rate cuts are still on the table. Much will depend on the transmission effects of the latest cut on the economy — how effective it is on spending, containing non-performing loans (NPLs) and supporting loan growth, especially after the moratorium period. Also, any decision on more cuts is possible if the downside risk on the economy remains high. Besides, the inflation outlook for 2020 remains weak, at between 0.3% and -1.5%, suggesting that there is ample room for more rate cuts, if necessary.

• Meanwhile, the use of MGS and MGIIs for SRR is seen as positive. It will help to ease liquidity issues given the current uncertain environment. With the SRR ratio maintained at 2%, and the use of MGS and MGIIs as part of SRR compliance, it would release an additional RM16 billion in liquidity into the financial system. It also bodes well for the bond market as we expect more issuances to finance the fiscal stimulus, projected at RM145 billion.

• Also, it should help banks as they shoulder the burden of the loan moratorium and face the potential risk of rising NPLs. With the rate cut, banks’ NIMs (net interest margins) will be further compressed as well. Hence, the 50bps cut should see both NIMs and earnings to be impacted by 4–8bps and 2–6%, respectively.

Source: AmInvest Research - 6 May 2020