The decision to reduce the overnight policy rate (OPR) by 25 basis points (bps) to 1.75% was in line with our expectation and market consensus. As our probability assessment showed a 70% chance for a 50bps cut in July, this implies there is still room for another 25bps cut in the next MPC meeting on 10 September. In our view, 2H2020 will remain challenging, governed by uncertainties.

With the monetary policy continuing to play an important role, and supported by the fiscal and financial measures, the base case for 2020 GDP is that it should contract around 2% with the downside at 5%. Following the 25bps cut, banks’ earnings will come under pressure – NIMs by 2–4bps and net profit by 1.3%. However, these should be cushioned by prudent management, higher non-interest income, loan growth and borrowers’ lower debt-servicing burden.

• The decision to reduce the overnight policy rate (OPR) by 25bps to 1.75% fell within our expectation and market consensus. As our probability assessment showed a 70% chance for a 50bps cut in July, this means there is still room for another 25bps cut in the next MPC meeting on 10 September.

• In our view, 2Q2020 will report the worst performance in view of the movement control order (MCO) in Malaysia and lockdowns in other countries in a move to contain the spread of the pandemic virus. And the outlook for 2H2020 remains challenging despite the easing of lockdowns and the MCO.

• With political noises and trade war still very much in the cards, uncertainties remain. The risk of a second wave of virus infections cannot be ruled out. Also, it remains unclear if Covid-19 will be contained or will there be another round of lockdown. The focus will also be on 1 October when the 6-month moratorium on loan repayment ends. Will there be an extension or will it be a targeted measure?

• With such levels of uncertainties, the door for further monetary easing remains open. There is still ample room for BNM to reduce the policy rate even after slashing the OPR by 125bps to 1.75% now. With the monetary policy continuing to play an important role, and supported by the fiscal and financial measures, the base case for 2020 GDP is that it should contract around 2% with the downside at 5%

Source: AmInvest Research - 8 Jul 2020