Banks may see further compression in NIM

PETALING JAYA: Banks in Malaysia may see further compression in net interest margin (NIM) by three to four basis points (bps) should the central bank cut interest rates again in the coming months to support the country’s slowing economy.

Analysing the possibility of Bank Negara cutting the overnight policy rate (OPR) by another 25bps to 2.5%, Maybank Investment Bank (MaybankIB) Research said the move could further narrow banks’ average NIMs for 2020 to 2.12% from its current estimate 2.15%. This is after having taken into account the 25bps cut in OPR in January.

The brokerage expected the next round of OPR cut to be in May.

So, in total, this would imply a total NIM compression of 10bps this year from an average of 2.22% in 2019.

“Our earnings have already factored in the 25bp rate cut in January 2020. Assuming another rate cut in May, we estimate this would trim NIMs by three to four bps from our current estimates,” MaybankIB said in a recent report.

“Correspondingly, we estimate a 2.1% cut in earnings for 2020 and 2.9% in 2021 on average, stemming from the NIM compression. Following from the earnings revision, we expect average return-on-equity ratios to soften to 9.4% in 2020 and 2021 from current estimates of 9.5% and 9.7%, respectively,” it added.

According to MaybankIB, Alliance Bank Malaysia Bhd would see the largest NIM compression among its peers, given the bank’s larger variable rate loan portfolio and higher CASA (current account savings account) balances relative to its peers. As such, the impact on Alliance Bank’s earnings was also expected to be bigger with a potential 7% impact to its earnings for the financial year ending March 31, 2021.

Overall, MaybankIB maintained a “neutral” stance on the banking sector.

It retained its “buy” recommendation on RHB Bank Bhd, CIMB Group Holdings Bhd, AMMB Holdings Bhd and BIMB Holdings Bhd.

“With the weak gross domestic product (GDP) momentum, a further rate cut for the year (taking it to a total 50bps OPR cut in 2020) cannot be ruled out,” MaybankIB said.

Explaining the reason it expected the next round of OPR cut (if any) to take place in May, the brokerage said: “Our Economics team is of the opinion that Bank Negara will have to first analyse the impact of the initial 25bps OPR cut in January 2020 on the economy, as well as the effect of any fiscal stimulus package that the government announces. As such, the team believes it would be the Monetary Policy Committee meeting in May that will have to be closely watched for any further rate cuts.”

In January, Bank Negara cut the OPR by 25 bps to 2.75%, after lowering it by 25bps in May last year to 3%.

Last week, governor Datuk Nor Shamsiah Mohd Yunus said the central bank had ample room to adjust the OPR lower due to economic challenges amid the outbreak of the novel coronavirus (Covid-19).

Malaysia’s GDP growth in the fourth quarter of 2019 slowed to its lowest pace in a decade at 3.9% due to slower global growth and trade activities, contraction in public investments and disruptions in commodity-related sectors.

Nor Shamsiah conceded that the country’s economy could see further sluggishness in the first quarter of 2020 due to Covid-19, prompting speculations that the central bank would embark on another round of rate cut to mitigate the downside risk.

Meanwhile, AmBank Research said impact on banks’ earnings for every 25bps cut in OPR would be mild, with a reduction of between 1% and 3%, while impact on NIMs would be a reduction of around two to four bps.

“The impact of any OPR change will be short term (estimated three to six months) as the repricing of deposits to lower rates will eventually catch up with the drop in lending rates,” the brokerage said.

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Bank Negara , overnight policy rate , OPR


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