On 7 May, BNM decided to reduce the Overnight Policy Rate (OPR) from 3.25% to 3.0%. Though a 25bps cut is not sharp, it could however put some short term pressure on the banks’ net interest margins (NIM). Over the next 6-12 months, NIM pressure may gradually ease as the repricing impact of deposit rates take effect. We estimate that banks may experience about a 1.4-3.9% full-year impact on 2019-20E net profit, on a pro-forma basis. Among the banking stocks, Alliance Bank may see more immediate impact on their net profit due to its more asset-sensitive balance sheet. We maintain NEUTRAL on the banking sector, noting that the rate cut is expected to support overall domestic growth in 2019. Our top picks: Alliance Bank and Aeon Credit.

25bps Rate Cut in Response to a Moderating 1Q19 Domestic Economy

On 7 May, BNM has decided to cut the OPR by 25bps (to 3.0%), ahead of the expected release of the country’s 1Q GDP growth numbers on 16 May. Though our house view was that the OPR would stay unchanged, it was nevertheless not a surprise given the widespread anticipation by the street and moderation in domestic economic activities in 1Q19. In the policy statement, BNM highlighted the risk of moderation in global growth going forward of which could affect the country’s external sector. Our economics team expects that there will be no further rate cuts for the rest of 2019, given our country’s low inflation and resilient household/private capital spending.

Short-term Impact on Banks’ Net-interest-margin (NIM)

The OPR cut would result in some downward pressure on NIM, which will be more prominent in the first 3 to 6 months given the immediate repricing effects of -25bps on existing variable rate loans (details Fig 1) and for new loans. Based on the respective bank’s fixed deposits (FDs) and NIDs maturity profile, this would determine how much interest rate risks a particular bank is exposed to. Based on Fig 4, between 72.7% to 80.7% of banks’ FDs and NIDs have maturity within 6 months, implying that NIM may start normalizing after 6 months as deposit rates are repriced down.

Higher Impact on Banks With a More Asset-sensitive Balance Sheet

Based on our simulation of a 25bps cut in interest rates on our universe banks’ net profits and NIM (Fig 1), the net profit impact ranged from -1.4% to -3.9%. Banks with a more asset-sensitive balance sheet, i.e. a greater proportion of variable-rate loans against fixed-rate loans in their portfolio, such as Alliance Bank and CIMB may see a higher net profit impact of -3.9% and -3.2% for FY19E, based on a full-year impact assumption. Hong Leong Bank, AMMB and Public Bank may see less impact of a 25bps cut on earnings.

Source: Affin Hwang Research - 8 May 2019