KUALA LUMPUR: Bank Negara Malaysia’s move to cut the Overnight Policy Rate (OPR) by 25 basis points will not have a significant impact as the economy is expected to contract this year.
CGS-CIMB Equities Research said on Wednesday that overall OPR cuts tend to be positive for cyclical sectors such as property, auto, and consumer due to the increase in consumers’ disposable incomes.
However, due to an expected contraction in the economy, “we do not expect the impact to be significant as Malaysia economy is expected to contract in 2020F”, it said.
CGS-CIMB Research said an OPR cut is negative for banks, as the downward re-pricing of lending rates has historically been wider than the decrease in deposit rates, leading to potential narrowing in the banks’ net interest margins.
It has imputed the 25bp rate cut into its earnings projections for banks under its coverage.
“Keeping our FBM KLCI earnings intact and index target of 1,496, ” it said.
The KLCI fell in the three months following five of the past eight rate cuts. This reveals that though a rate cut would help businesses reduce their borrowing costs, it may not be sufficient to boost KLCI performance as bank earnings will be negatively impacted.
“We will progressively adjust the net interest impact on KLCI companies but do not expect this adjustment to have a significant impact on our current KLCI earnings estimate of -11.2% for 2020F.
“We keep our KLCI target of 1,496 (still based on 16 times forward P/E), ” it said.
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