‘Most banks expect another OPR cut’

KUCHING: Majority of banks are expecting a further 25bps overnight policy rate (OPR) cut, in line with an economist’s view, but the impact of further rate cuts in the second half (2H) would not be as severe on net interest margins (NIMs) as that in 1H.

The policymakers will meet on Thursday before holding the last meeting on November 3.

The central bank has already delivered a cumulative 125 bps cut at the last four meetings, taking the key policy rate below the all-time low of 2.0 per cent set during the Global Financial Crisis in 2008-2009.

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), the guidance on NIM compression was raised to 15 to 20bps (previously circa 15bps) to take into account the impact from the modification losses and July’s OPR cut.

“Looking ahead, the majority of the banks was expecting another round of 25bps OPR cut, either during the September or November Monetary Policy Committee (MPC) meeting, with one bank not ruling out the possibility of up to 50bps cut by year end,” Kenanga Research said in a banking sector update.

“Our economist believes Bank Negara Malaysia (BNM) has room for another 25bps OPR cut before the year is out and we have factored this in our forecasts.”

However, with the OPR having been cut by 100bps in 1H of current year 2020 (1HCY20), the research arm believed the impact of further rate cuts in 2H would not be as severe on NIMs as that in 1H.

“Firstly, the repricing of fixed deposits from the OPR reductions in 1H lag interest rate sensitive assets and would mainly occur in 2H to cushion the impact of further rate cuts.

“Secondly, current account and savings account (CASA) growth in 1H has been robust, allowing the banks to shed costlier fixed deposits and lower funding cost.

“Finally, some banks have said that due to the weak loan growth and adequate liquidity in the system, the banks have not had to compete aggressively for deposits.”

As such, the research arm highlighted that in some cases, fixed deposit rates are being cut at an even steeper rate as compared to the reduction in OPR.

“We would continue to watch out for banks’ regulatory and fair value through other comprehensive income (FVOCI) reserves as these would help provide support for capital and an indication as to the banks’ trading book positions with respect to further OPR cuts in 2H.”

With banks taking a hit in terms of loan impairments, Kenanga Research expected banks to draw down on their regulatory reserves to help cushion the higher credit charges on capital.

“Similarly, for banks with healthy FVOCI reserves, these banks may be able to take advantage of the OPR cuts in 2H to book in trading and investment gains to provide support to earnings and/or capital, as seen in the 1H results.”

Earlier this week, Principal Asset Management Bhd (Principal) chief executive officer Munirah Khairuddin also expects BNM to cut the OPR by 25bps, saying that the central bank would remain accommodative to spur market investment and to boost local consumption.

She said this stance would likely be prolonged for the next three years as a way to ensure the economy is recovering across all sectors and back on a stronger footing post-Covid-19 pandemic.

“There are segments more affected than others like the small and medium enterprises.

“In addition, we haven’t seen the real effect of post-moratorium (to the economy). I think BNM will be very cautious,” she told reporters on the sidelines of the Principal 2020 Global Summit.

Munirah said the lower interest rate would continue to attract investors that are hungry for yield and this would continue to support the equities.

“With such low interest rate at the moment, money is looking for a home so we could see flows coming in quite strongly, starting from July.

“Retail participation in the stock market jumped about 30 times, but real money like institutional and corporate money will continue to be there,” she said.