Banks to feel impact of another OPR cut?

Unperturbed, AMMB Holdings Bhd group CEO Datuk Sulaiman Mohd Tahir says the lender has already factored in future rate cuts.“In our scenario planning, we have already factored in potential rate cuts as part of our risk management plan, ” he tells StarBizWeek.

WITH a large portion of Malaysia now in full-swing movement control order (MCO) mode given the recent spike in Covid-19 cases, new concerns over economic growth have emerged.

The question now is will Bank Negara cut the benchmark Overnight Policy Rate (OPR) to spur growth at its upcoming Monetary Policy Committee (MPC) next week?

And if it does, will banks continue to see lower profits from last year, as the OPR determines their main rates, including their lending and deposit rates.

Generally, a lower OPR means banks offer a lower lending rate to their customers, earning them (the banks) less profits in the process with lending being one of the main ways in which they make money.

Notably, the central bank left the OPR unchanged at 1.75% for the second time at its last meeting in November.

However, with the recent turn of events which is seeing the country registering daily new highs in the number of Covid-19 cases and a state of emergency declared, economists say Bank Negara would probably have turned more cautious on growth which could in turn cause it to cut the OPR at the upcoming meeting.

The banks, however, do not appear to be overly concerned over this at this point in time although if it happens, it could be a double whammy of sorts for them.

This is because the full effects of the end of the blanket moratorium on their earnings have yet to be seen.

A blanket moratorium – a halt on loan payments – was introduced by the government back in April last year for a period of six months, as a result of the Covid-19 pandemic, which caused many people to lose their source of income, and therefore, be unable to make good on their loan payments.

Banks took a hit and now that the blanket moratorium has ended and with the Covid-19 pandemic still ongoing, there are lingering concerns that the banks’ non-performing loans or bad loans, are going to increase.

Unperturbed, AMMB Holdings Bhd group CEO Datuk Sulaiman Mohd Tahir says the lender has already factored in future rate cuts.“In our scenario planning, we have already factored in potential rate cuts as part of our risk management plan, ” he tells StarBizWeek.

AmBank made a net profit of RM237mil in its latest quarter, down 35% on a year-on-year basis over the same period.

It also set aside an additional RM205mil to “strengthen provision coverage” during the quarter.

Sulaiman says the focus would be on its next stage of growth with the implementation of its new four-year strategy, known as Focus 8 which will emphasise on the small and medium enterprises or SME business.

According to him, a rate cut, should it happen at this juncture, would be the right move.

It would provide Malaysians with some “breathing space” as the current MCO 2.0, while absolutely necessary, will undeniably have an impact on the business environment, economy, and subsequently, income and jobs.

“With interest rates lowered, it would not only aid the rakyat in these challenging times but also consequently boost consumption, which will in turn aid our Malaysian businesses not only to stay afloat, but potentially thrive, ” he adds.

Economic outlook

CIMB Group Holdings Bhd isn’t as optimistic.

The bank tells StarBizWeek that although there is a general expectation for a rebound in economic growth this year after a contraction last year, it believes that the economic outlook for this year remains uncertain given the continued disruption brought about by the pandemic.

“Under this scenario, rate cuts are a possibility and may have an impact on all financial institutions, ” it says.

It adds that CIMB will remain focused on supporting growth sectors, assisting its customers affected by the pandemic and executing its strategic plans.

For 2021, CIMB will be guided by its Forward23+ strategy which will see it reshaping its portfolio and investing in growth areas and its digital business.

“Cost management will remain a core focus area to improve productivity and efficiency.”

Another senior banker believes that an OPR cut at the next MPC meeting is not likely to happen.

“In the first MCO last year, up to 85% of gross domestic product (GDP) operations were affected, now it is only about 45% to 50%, so it is not the same scenario, ” he says.

Last year saw a cumulative 125 basis points reduction in the OPR, bringing the rate down to the current 1.75%.

Meanwhile, banking analysts feel that if there is a cut in the OPR soon, the impact on banks will generally be muted.

MIDF head of research Imran Yusof says while the research house is maintaining its OPR outlook for now, in the event that there is an OPR cut, it opines that the impact on banks will not be significant.

This is due to the fact that deposit competition has been benign and this might continue into 2021 with deposit growth in 2020 having been mostly led by the current account savings account (CASA) business, he says.

Having said that, he notes that there will be a compression of net interest margins in the event of an OPR cut but this should normalise quickly, most likely by the first quarter.

“Therefore, while we do expect banks’ earnings to be impacted, it will not lead to a contraction in earnings in 2021, as what we had observed in 2020.

“We also have to bear in mind that we expect provisions to be less this year as the economy is starting to recover.

“Taking all these into consideration, if there is an OPR cut, there might be some tweaks to our numbers but we believe it will not derail our (bank earnings’) assumptions, ” Imran says.

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