Retained OPR positive for bank earnings

  • Banking
  • Saturday, 12 Sep 2020

CGS-CIMB: Our economists now expect an end-2020 OPR of 1.75% (versus 1.5% previously), which implies no more OPR cuts for the rest of the year.

KUALA LUMPUR: The move to retain the overnight policy rate (OPR) at 1.75% is positive for banks as it will relieve pressure on their margins.

A cut in the key benchmark interest rate would have impacted net interest margin (NIM) of banks, resulting in lower earnings.

NIMs have been under pressure with a total of 125 basis points (bps) cuts so far this year. Bank Negara left the OPR unchanged at its fifth monetary policy committee meeting on Thursday.

CGS-CIMB Equities Research said it estimated that every 25bps OPR cut would lower banks’ financial year 2021 (FY21) forecast net profits by around 2%. “Our economists now expect an end-2020 OPR of 1.75% (versus 1.5% previously), which implies no more OPR cuts for the rest of the year.

“As such, we are likely to revise our current assumptions of a 150bps OPR cut to 125bps OPR cut (in line with the revised house view).

“On a preliminary basis, we estimate this could potentially lead to 1%-2% upgrades in our net profit forecasts for banks. We think that the 125bps OPR cuts this year would have had a negative impact of about 10% on banks’ FY20 net profit (on a full-year basis), ” it said.

Meanwhile, AmInvestment Bank, which is maintaining its “neutral” stance on the banking sector, said the sector’s underlying NIM fell 11bps quarter-on-quarter in the second quarter due to the OPR cut of 50bps in May.

For 2020, it expects the sector’s NIM to be compressed by 14bps while a flat interest margin, on average, is expected for 2021.

Banks’ six months (2020) core calendarised earnings growth slipped 13.4% year-on-year due to lower interest income from consecutive OPR cuts and higher provision.

CGS-CIMB said its analysis revealed that the net profits of Alliance Bank Malaysia Bhd and BIMB Holdings Bhd were the most sensitive to OPR movement.

The research house said while the pause in OPR cuts was a positive surprise for Malaysian banks, they nevertheless would still have to grapple with the negative impact of the 125bps cuts so far this year, which could even be felt in 2021.

However, the potential pick-up in loan growth in the second half of the year should help to partly offset the negative impact from OPR cuts.

The research outfit is retaining its “neutral” call on banks.

“We also deem banks’ valuations to be reasonable with calendar year 2021 price-earnings ratio of 10.7 times, versus the five-year historical average of 12.5 times. Our picks for the sector are Public Bank Bhd, RHB Bank Bhd and AMMB Holdings Bhd, ” it said.

AllianceDBS Research is taking a bearish view on loan growth at 3% for its projection for 2020. It expects banks to remain conservative in their underwriting processes, given the economic uncertainties and lingering asset-quality concerns.

Loan growth in the banking industry expanded 4.5% in July this year, growing at a faster rate than the 4.1% in June, according to the latest banking statistics released by Bank Negara.

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OPR , interest rate , banks , margins , CGS-CIMB ,


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