Banks to lower lending rates after OPR cut but by how much?

Banks were among the gainers on Bursa Malaysia on Tuesday.

KUALA LUMPUR: Banks are expected to lower the lending and saving rates after Bank Negara Malaysia (BNM) unexpectedly lowered the Overnight Policy Rate (OPR) by 25 basis points to 3% on Wednesday.

CIMB Equities Research said on Thursday the OPR cut should lead to a reduction in banks’ lending rates but the decline may not be as big as 25bps.

“In the worst-case scenario, a 25bps OPR cut would lower banks’ FY17 net profit by about 5%. On a positive note, the rate cut should catalyse the banks’ loan growth,” it pointed out.

CIMB Research maintained Overweight on expected earnings per share (EPS) recovery in 2016 and attractive valuations.

“We believe this (cut in OPR by 25bps) would lead to a reduction in the base rate (BR)/base lending rate (BLR), as well as fixed deposit (FD) rates for banks in the next one to two weeks. 

“Based on past experience, the cut in lending rates is likely to be wider than the reduction in FD rates, and this gap will determine the erosion in banks’ margins,” it said.

CIMB Research said under the previous BLR regime, adjustments in BLR were in mostly in line with the OPR changes. Currently, under the BR regime, effective since early-2015, banks can fix their own BRs based on their respective cost of funds which are not necessarily determined by the OPR. 

“Following the OPR cut, we think that banks will lower their lending and FDrates by up to 25bps but the magnitude is still uncertain at this juncture.

“Based on a worst-case scenario that assumes a cut of 25bps in BR/BLR and 20bps in average FD rates, banks’ FY17 net profit would be lowered by circa 5%. The worst affected lender would be Alliance with a net profit impact of about -11%, as its variable rate loans make up 89% of total loans in FY17, the highest in the industry.  

"The least impacted would be Hong Leong Bank at -3.6%. We see this as the worst-case scenario s the quantum of adjustments are still uncertain at this juncture,” it said.

CIMB Research said on a positive note, the rate cut should catalyse banks’ loan growth as it will lower the cost of borrowing. This would be timely for the industry’s loan growth, which sank to only 6.3% on-year in May 2016, the worst in nine years. 

“Based on our estimates, a one percentage point upward adjustment in our loan growth forecasts would raise our projected net profit by an average of 0.7%.

“We maintain Overweight on the sector, premised on potential re-rating catalysts of (1) EPS recovery in 2016, and (2) attractive valuations. 

“While the magnitude of the cuts in lending and FD rates are still uncertain, we believe banks will try to minimise any margin contraction, especially in light of their currently thin net interest margins following years of margin erosion. On a positive note, the rate cut would, to certain extent, help to revive banks’ loan growth. Our top pick is RHB Bank,” it said.