A 25bps Pre-emptive Rate Cut to Spur Economy

On 22 January, BNM announced a pre-emptive rate cut on the Overnight Policy Rate (OPR) from 3.0% to 2.75%. The impact of a 25bps cut is not material on the overall banks’ bottom lines on a fullyear basis, but will have short-term pressure (at least for 2 quarters) on the banks’ net interest margins (NIM), due to the immediate repricing effects of the variable loan rates. NIM will likely start to normalize in 3QCY20 as the downward repricing of deposit rates takes effect. We estimate that banks may experience a -1.0% to -5.8% impact on their respective FY20E-21E net profits. Among the banking stocks, we expect Alliance Bank, RHB and CIMB will bear a larger negative impact on their net profits due to their more assetsensitive balance sheets. Hong Leong Bank, AMMB, Public Bank and Maybank may see minimal impacts on earnings under a rate-cut scenario. We maintain our NEUTRAL on the banking sector.

25bps Rate Cut to Sustain Growth Trajectory

On 22 January, BNM decided to cut the OPR by 25bps to 2.75%. BNM considers the current monetary policy stance to be appropriate to sustain economic growth with price stability. The reduction in the OPR is in line with our house view of a cut in 1H20, in light of the moderating economic growth. Meanwhile, for the rest of 2020, our Economist does not expect any further rate cuts given our country’s resilient macroeconomics fundamentals.

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

Inevitably, banks will see an immediate negative impact on earnings arising from the OPR cut, and likewise, their net interest margin (NIM). A NIM compression 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 risk a particular bank is exposed to. Based on Fig 4, between 50% to 83% of banks’ FDs and NIDs have maturities within 6 months, implying that NIM may start normalizing after a 6-month period.

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

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 -1.0% to -5.8%. 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, RHB and CIMB, may see a higher adverse net profit impact of -5.8% (for FY21E), -5.3% (for FY20E) and -4.1% (for FY20E) respectively. Hong Leong Bank, AMMB, Public Bank and Maybank may see minimal impact on earnings under a rate cut scenario.

Source: Affin Hwang Research - 23 Jan 2020