Ripple effects of the OPR cut

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 “It’s not that we expected growth to be weaker in the second half. We anticipate it to be stronger and that growth for the whole year is expected to remain between 4.0 and 4.5 per cent.” Datuk Muhammad Ibrahim, BNM Governor


“It’s not that we expected growth to be weaker in the second half. We anticipate it to be stronger and that growth for the whole year is expected to remain between 4.0 and 4.5 per cent.”
Datuk Muhammad Ibrahim, BNM Governor

KUCHING: Bank Negara Malaysia cut the Overnight Policy Rate (OPR) in what some call a “game-changing move” as economists across the board did not anticipate it.

The OPR is an interest rate at which a bank lends to another bank, which is set by BNM. It indicates the health of a country’s overall economy and banking system; subsequently having an effect on the country’s employment, economic growth and inflation.

The central bank decided to cut the rate due to the uncertainties in the global environment, which could negatively impact Malaysia’s growth prospects. The rate reduction consequently also lowered inflation forecasts for this year.

Inflation forecasts are lowered to two to three per cent in 2016, compared to an earlier projection of 2.5 to 3.5 per cent, and are expected to continue to remain stable in 2017.

“Looking ahead, there are increasing signs of moderating growth momentum in the major economies. Global growth prospects have also become more susceptible to increased downside risks in light of possible repercussions from the EU referendum in the United Kingdom.

“International financial markets could also be subject to greater volatility going forward. In this light, global monetary conditions are expected to remain highly accommodative,” BNM said in a statement.

The decision to cut the overnight policy rate (OPR) is a pre-emptive action to ensure that the economy continues to remain on a steady growth path, says Bank Negara Malaysia (BNM) Governor Datuk Muhammad Ibrahim.

“It’s not that we expected growth to be weaker in the second half. We anticipate it to be stronger and that growth for the whole year is expected to remain between 4.0 and 4.5 per cent.

“Now, what we intend to do is to ensure this happens. Basically it is a pre-emptive move,” he told Bernama in his maiden media interview since his appointment as the central bank Governor on May 1, 2016.

On the rationale for the rate cut now, he said the window of opportunity had presented itself as among others, inflation had gone lower-than-expected.

“The window of opportunity is there, we just took it in our stride and say, look let’s give a boost to the economy, create an enabling environment so financing will be healthy, economic activities can prosper and people are able to generate more wealth and income.”

Currently, there are no plans by the MPC to change the interest rates over the next few meetings, he said, stressing that the central bank would always look at the data objectively and see what was needed.

“So, to say that there will be a series of rates cut is not true, but it’s true we will keep an open mind everytime we sit (down for the meeting),” he added.

Muhammad said the central bank, given the dynamic environment, looked at many factors when deciding on the monetary policy including developments in other countries.

However, a decision on the monetary policy is ultimately based on domestic considerations and has always been forward looking.

 

What does this mean for Malaysians?

The 25 basis points reduction in borrowing rates, consumers will be able to see a hike in their disposable income due to the reduction in interest payments.

“What this means is, consumers will have more cash on hand to spend, which will likely spur the domestic economy,” opined iMoney editor Iris Lee.

“Any changes will impact floating rate loans which are common for mortgages. When there was an increased in OPR, there was a knock-on effect on the rates charged by banks for home loans for the simple reason that banks adjust their lending rates by a similar quantum when OPR changes. The same effect will likely happen when the rate is cut.

“For example, if the banks decide to stick to their current margins, and the Base Rate reduces by 25 basis points, new and existing loan (variable rate) borrowers will see a reduction in their monthly repayment.

“Though this seems like good news for borrowers, the rate cut may also have an impact on savings rate.”

Other impacts were more immediate. The day after the OPR cut announcement, Malaysian bond yields fall to its lowest since 2013.

Malaysian bonds rose for a second day and the three-year yield dropped to its lowest level since 2013 after the central bank unexpectedly cut interest rates on Wednesday.

The three-year bond yield fell eight basis points to 2.89 percent as of 12.10pm in Kuala Lumpur the day after, the lowest for a benchmark of that maturity since May 2013, according to a Bloombrg report.

Also, Bursa Malaysia is likely to trend higher on improved sentiment including the OPR cut, rebound in oil prices, global bank stimulus and a stronger currency.

Affin Hwang Investment Bank Vice-President and Retail Research Head, Datuk Dr Nazri Khan Adam Khan said the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) was ready to stage further upside if the ringgit and commodities continued to strengthen.

“The index should be bullish with the rate cut although the broad market is slow to react. We see the OPR cut as a pre-emptive move to ensure that inflation remains under control and the economy remains on a steady growth path,” he told Bernama.

This was confirmed by the Malaysian bonds three-year yield which dropped to its lowest level since 2009 and a stronger ringgit which hit a 10-week high against the US dollar this week, he added.

He said technically, the FBM KLCI had broken out from its consolidation zone and was still looking to test its immediate resistance level at 1,680.

“Overall, given the buoyant mood coming from global markets as well as positive catalysts in the domestic front, we reckon that the FBM KLCI could be poised to trend upwards this week to break out from its consolidation zone.”

 

Mixed view for bankers

For consumers of the banking sector, the lower OPR is expected to alleviate pressure on customer affordability and ability to service interest costs only by a small quantum as the cut in OPR is not sizeable.

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For banks however, impact is mixed. On one hand, TA Securities Holdings Bhd (TA Research) expects the cut to help ease pressure on cost of funds.

“Given the current operating environment, we believe this rate cut will help ease pressure on funding costs,” it said in a sector report last week. “This will be positive for the sector since banks have been competing intensely on the deposit front to ensure BNM’s liquidity coverage ratio (LCR) rules are met.

“Here, banks with high exposure to fixed deposits (FDs) such as AMMB Holdings Bhd, RHB Bank and Maybank would benefit. However, we believe the positive impact to earnings would only be felt over a longer period as banks re-price maturing deposits lower throughout the year.”

TA Research said banks with higher CASA deposits such as CIMB, Maybank and Alliance Financial Group would see a more immediate impact, although it noted that the cost savings here would only be about one-third of total cost savings from lower FDs.

On the other end of the spectrum, MIDF Amanah Investment Bank Bhd (MIDF Research) expects a short term negative impact on the share price of banking stocks.

“We anticipate net interest margins (NIMs) of banks to decline, negating the recent positive improvement in loan yield from hikes in base rate, base lending rate (BLR) and upward repricing of auto and mortgage loans as well as from a more aggressive growth in loans,” it said in a separate note.

“This will leave banks’ NIM to continue to be compressed by high cost of funds from intense deposit competition while loan growth is expected to moderate ahead while the sector’s liquidity remains tight. Overall, this will lead to a wider compression in NIM than our earlier expectation.”

AllianceDBS Research took the middle ground, pegging the impact on banks as minimal, but slightly more pronounced on CIMB due to its low share of fixed rate loans.

It drew inspiration from the previous cuts in OPR back in November 2008 to April 2009 when BNM made three consecutive cuts, bringing OPR down from 3.50 per cent to two per cent.

“Following the cuts in OPR, NIM slipped by 12bps in 1Q09, but rebounded in the following quarter. We do not expect the impact on NIM to be as sizeable as in the past as the present cut in OPR is not as steep, unless this is the first of more to come.

“There may not be an immediate impact to banks’ Base Rate but over time, as KLIBOR and cost of funds adjust, there should be revisions to the Base Rate. Hence, we expect minimal impact on overall lending rates. Separately, there is also little impact on asset quality. Although lower rates may ease instalment payments, the reduction is minimal.

“We retain our view that any deterioration in asset quality would be manageable, although blips may appear on a sporadic basis.”

MIDF Research also highlighted NIMs of banks are expected to decline whenever there are cuts in OPR. However, it expect the pressure on NIM from the recent cut in interest rate to be temporary with the NIM eventually normalizing back up thereafter.

“This is due to adjustment in the rate of floating rate loans downwards first before deposits rates, particularly FD rates which have been contracted before the OPR cut get adjusted downwards. Our expectation is that there will be a lagging impact on the adjustment of deposits rates over a period of two to three quarters.”

 

Banks reduce base rates

Maybank

Malayan Banking Bhd (Maybank) made the first move to lower their base rates on July 14.

Maybank announced a reduction in its BR and base lending rate effective immediately in line with BNM’s move to lower its OPR to three per cent.

The bank said its base rate will be decreased by 20 basis points from 3.2 per cent to 3 per cent per year, while its base lending rate will be revised downwards from 6.85 per cent to 6.65 per year.

“Similarly, the Islamic base rate and base financing rate  will be reduced by 20bps to three per cent and 6.65 per cent per year respectively from 3.2 per cent and 6.85 per cent previously,” the bank said in a statement.

Along with the reduction in the rates, Abdul Farid said Maybank’s deposit rates will also be revised downwards by up to 20 basis points.

 

AmBank

AMMB Holdings Bhd (AmBank Group) will reduce its base rate (BR) and base lending rate (BLR) by 20 basis points (bps) to 3.8 per cent and 6.65 per cent respectively, from July 19.

In a statement, AmBank Group and AmBank (M) Bhd chief executive officer Datuk Sulaiman Mohd Tahir said rate reduction will not impact the banking group’s performance.

“While BNM’s decision to reduce the OPR was unexpected, the move comes at the right time and will have positive ramifications for consumers as well as the Malaysian economy.

“With Malaysia’s gross domestic product for the first quarter of 2016 slowing down on a year-on-year basis, it is evident that headwinds continue to pose a challenge to the market.

“In addition, the outcome of the recent EU referendum is expected to have an impact on global economies in the months ahead, [thus]a reduction in interest rates will help to offset these instabilities by encouraging consumption and investments,” he said.

 

CIMB

CIMB Group lowered its Base Rate by 20 basis points for loans/financing products for its Malaysian business.

CIMB’s BR will be reduced from 4.1 per cent to 3.9 per cent per annum and its Base Lending Rate/Base Financing Rate will be decreased from 6.95 per cent to 6.75 per cent per annum effective July 22.

As a result, all loans/financing pegged to base rate, base lending rate and base financinf rate will be adjusted accordingly. In line with this change, CIMB’s deposit rates will be revised downwards by up to 20 basis points.

 

RHB

RHB Banking Group’s units, RHB Bank and RHB Islamic Bank, will reduce their base rate to 3.80 per cent from 3.90 per cent per annum with effect from Friday.

Both banks will also reduce their base lending rate and base financing rate from 6.85 per cent to 6.75 per cent per annum.

“The revision in rates will spur a more agile financial environment.

“It will also promote greater domestic demand and boost economic growth, as well as ease the financial burden of our customers,” said managing director Datuk Khairussaleh Ramli.

 

Mild recovery for consumer sector

The latest OPR cut, coupled with an expected low inflation of two to three per cent, should boost domestic consumption.

“Based on historical BNM data, approvals for credit cards and loans to the household sector were on the higher end of their respective 10-year ranges during the last rate cut period while personal loan approvals remained healthy, hovering close to its 10-year trend average of 45 per cent,” noted AmInvestment Bank Bhd (AmInvestment Bank) on the sector.

“That said, we expect the positive impact to be limited given Malaysia’s already high household debt-to-GDP ratio of 89  per cent and still soft consumer confidence.

“As it is, our in-house economics team is forecasting a lower GDP of four per cent for this year against 2015’s five per cent with private consumption growth anticipated to ease to five per cent from 6.1. All in, we reiterate our neutral stance on the whole consumer sector.”

Kenanga Investment Bank Bhd (Kenanga Research) was also less than convinced on the cut’s ability to save the day.

“As of our report cut-off date on Jun 30, 2016, the KL Consumer Index (KLCSU) has outperformed KLCI with return of 1.2 per cent vis-à-vis the latter’s negative 2.3 per cent returns.

“We believe the recent round of results announcement was not convincing enough for investors to believe that the worst is over and thus a stronger set of results is required to propel the performance of the index.”

Kenanga Research observed certain index stocks that performed the best include F&N and Dutch Lady with returns of 35.8 per cent and 22.7 per cent respectively, which is likely to be driven by the low commodity prices, particularly milk powder.

On the flipside, it noted automotive players UMW and TCHONG were the index laggards with negative returns of 27.2 per cent and 25.9 per cent, respectively, believed to be dragged down by softening car sales and negative forex impact.

The true move giving stability to consumer sector, it said, was the government’s extension of the current anti-profiteering mechanism until December 31, 2016 from June 31, 2016.

To recap, the act was introduced in conjunction with the GST implementation on April 2015 in order to deter traders from indiscriminately raising prices of goods or profiteering from GST.

“Thus, any price increases will continue to be examined and businesses will need to ensure profit margin is unchanged should any price increase is made.

“We are positive on the extension as the price level of goods – particularly key necessities – will be controlled on the back of inflationary pressure led by the implementation of minimum wage starting July 1, 2016.

“As such, we believe the extension will also provide stability as input costs are unlikely to inflate excessively and hence giving companies more visibility to plan for production as well as the sales and marketing strategy.”

The research firm continued to anticipate slow recovery ahead as according to the Malaysian Institute of Economic Research, the Consumer Sentiment Index has mildly rebounded in 1Q16 from multiple-year low in 4Q15.

However, the index suggests that the confidence level of the local consumer is still way below the threshold level of confidence at 100 points as the uncertainty over the economy and job market outlook still remain as consumer biggest concerns.

“Nonetheless, we view the recovery as half-glass full, taking comfort from the fact that the sentiment has not sunk further from a low base as consumers might have adapted to the new costing environment one year after the GST implementation,” it added.

“Moving forward, we expect the sentiment to continue recovering from the low base but a strong surge in confidence level is unlikely barring an emergence of powerful positive changes.”

 

Slight boon for properties

The cut is a small positive surprise to property sector, opined MIDF Amanah Investment Bank Bhd (MIDF Research), who believed that the lower interest rate will eventually translate into slightly better sales by property developers.

“However, the magnitude of improvement to property developer’s sales is likely to be small as banks remain stringent on lending while Consumer Sentiment Index (CSI) remains weak,” it said. “Recall that MIER mentioned that 1Q16 CSI is still below the threshold level of confidence while the job outlook clouds expected income of consumers.”

MIDF Research said while interest rate cut may lead to an improvement in property demand, signs of clear uptrend are yet to be seen.

“Recall in our sector report on July 8, we mentioned that property demand increased for the first time in 16 months after increasing two per cent year on year to RM25.79 billion in May 2016.

“With the cut in interest rate, consumer sentiment towards property purchase may be boosted. We will continue to monitor the increase in demand to see whether it is a sustained change in trend upon which we will then decide whether to upgrade the sector to positive.”

In terms of financing a current property, Hong Leong Investment Bank Bhd (HLIB Research) estimated that a 25 basis point rate cut will reduce monthly instalment by circa three per cent or RM67 per month for RM500,000 property with loan tenure of 30 years .

For every RM3,000 of fixed monthly instalment, a 25bps cut will raise the amount of loan eligibility from RM585,000 to RM603,000 or a three per cent increase.

“We opine that a 25 bps cut would not impact underlying demand significantly given the muted impact on affordability,” it said. “However, we view the rate cut positively on near term sentiment given the low expectation on the property sector.”

Drawing parallels with the rate hike of 2014, TA Securities Holdings BHd (TA Research) expects a more muted impact to property sector this time aroun.

“We note when BNM increased OPR by 25bps to 3.25 per cent back in July 2014, the average lending rate was relatively stable. With the new Base Rate framework, which came into effect on January 2, 2015, whereby interest rates are determined by the banks’ benchmark cost of funds and Statutory Reserve Requirement (SRR) as well as other components of loan pricing, we expect the adjustment to banks’ effective lending rates could be lesser.

“Assuming the banks adjust their BRs accordingly, our sensitivity analysis suggests that a 25bps cut in lending rate will decrease monthly repayment of a 30-year loan by 2.9 per cent.

“Nevertheless, we believe a 2.9 per cent decrease in monthly repayment alone is insufficient to convince consumers to commit to big ticket purchases. In view of the challenging macro environment, consumers may prefer to hold more financial buffers for living expenses and to protect themselves against rising costs and unexpected adverse events.”

It went on to note that demand for houses remained unperturbed by interest rate hikes during 2010-2013. The robust demand was largely fuelled by easy homeownership scheme with low initial capital outlay.

TA Research noted that demand started to ease only after the government introduced a series of cooling measures to calm runaway home prices. Coupled with banks’ tightening lending policies, residential loans applications dwindled despite average lending rates staying accommodative at around 4.45 to 4.75 per cent.

“Given that the weak consumer sentiment and stringent lending practice are the key dampeners to property sales, this reiterates our view that the loosening monetary policy alone is unlikely to revive the overall housing market. Also, a cut in OPR may not change the banks’ prudent stance in loans approvals.

“With that, we believe the 25bps rate cut will not boost property sales significantly.

“However, we would change our view if a combination of easing policies are introduced such as further OPR cuts, additional reduction in SRR, and reinstatement of property cooling measures. At this juncture, our economist views that BNM will maintain the current OPR at three per cent throughout the year.”

 

REITs see boost from Brexit, OPR cut

Following the rate cut by BNM, the team behind Hong Leong Investment Bank Bhd (HLIB) raised their call to overweight for REIT players.

“Much to our surprise, BNM cut the OPR by 25 bps to three per cent and we believe this will continue to spur market to move into yield assets as Malaysian REIT is often the darling of equity investors during monetary easing due to its stability and high yielding nature despite its average yield being compressed to 6.2 per cent.

“Moving forward, we expect the potential downside for M-REITs from external factors is limited with no immediate risk of narrowing yield spread given the monetary easing bias and its relative attractiveness amid the low yield environment and uncertainties in the global market.

“In line with our previous expectation, local consumption is getting a further boost from the expected interest savings resulting from OPR cut, improved sentiment, on top of normalisation of GST effect, festive seasons and measures to support disposable income; which is a relief to our earlier worry on softer rental reversion.

“While lower interest rate leads to potential lower interest expense, we do not expect significant interest savings for Malaysian REITs on its borrowing as majority of their borrowings more than 90 per cent are in fixed rate.”

This comes on the back of 10-Year Malaysian Government Securities (MSG) yields falling to a two-year low of 3.52 per cent last week, said MIDF Research, before increasing slightly to 3.58 per cent on Friday.

The latest decline in MGS yield can be attributed to the surprise OPR cut by Bank Negara Malaysia.

“The OPR cut boosted demand for yield assets, raising the price for MGS and hence compressing MGS yield further. Earlier on, MGS yield dropped due to heightened demand for safe haven assets during market uncertainties arose by Brexit,” MIDF stated.

“It is also noteworthy that the current 10-Year MGS yield of 3.58 per cent is near its 5-year minus 1 standard deviation level of 3.5 per cent.”

Lower MGS yield following Brexit and OPR cut is a boon for REITs as lower MGS yield widened the spread between MGS yield and REIT yield and hence improves the attractiveness of REIT which is now commanding higher yield premium.

“We increased the target prices for REITs under our coverage following the revision of MGS yield assumption which translates into lower discount rate in our Dividend Discount Model (DDM) valuation.

“We are keeping our neutral rating but with positive bias on REITs sector. We reiterate our view that REITs would continue to be benefited from flight to safety as it is perceived as a safe haven in time of uncertainty while the recent decline in MGS also improves attractiveness of REITs.”

“Meanwhile, we reckon that retail sales outlook should improve going forward after Malaysian retail industry recorded a 4.4%yoy decrease in sales for 1Q2016 which was owing to high base effect in 1Q2015. Our expectation of improving retail sales is banking on recovery in consumer sentiment.

“Note that Consumer Sentiment Index in 1Q2016 rebounded to 72.9 from all-time low of 63.8 in 4Q2015, indicating potential recovery in consumer spending.”

Another near term potential catalyst for the sector is the possible revision of REIT guidelines by the Securities Commission to allow for green development up to certain percentage of total assets value, similar to Singapore and Hong Kong, who allows development up to 25 per cent and 10 per cent of the REITs’ total value, respectively.