Re-rating catalyst for banking sector

Net interest income to benefit from unchanged OPR

PETALING JAYA: Banks are expected to have a better net interest margin (NIM) outlook in 2021, following the decision by Bank Negara to keep the overnight policy rate (OPR) unchanged.

CGS-CIMB Research analyst Winson Ng was positive on the decision to retain the OPR at 1.75% as a fresh cut would be detrimental to banks’ earnings prospects.

“Our economist’s change in view to now expecting a 25 basis points (bps) OPR cut in 2021 (from no cut previously) is negative for banks.

“However, this is narrower than the 125-bps cut in 2020, signifying a better NIM outlook in 2021.

“The expected rebound in net interest income and lower loan loss provisioning support our expectation of a recovery in net profit growth in 2021, acting as a re-rating catalyst for our ‘overweight’ call on the sector.

The year 2020 was a washout for the banking sector after the central bank slashed the OPR from 3% to 1.75% to support the flailing economy, resulting in a NIM contraction for the banks.

The industry’s NIM also came under pressure in 2020 as a result of the modification loss following from the loan moratorium.

While a cut in OPR lowers loan repayment costs for borrowers such as households and businesses, lenders or financial institutions generally take a hit on their profitability as they make less interest income on loans.Banks make a profit through the difference between the interest income generated by banks and the interest paid out to depositors. This is referred to as NIM.

In the event Bank Negara institutes another 25-bps rate cut in the next one year, Ng said the negative impact would be the greatest on BIMB Holdings Bhd (Bank Islam) and Alliance Bank Malaysia Bhd.

The estimated impact is about 7% to 8% on both banks’ net profits in the financial year of 2021 (FY21).

Meanwhile, MIDF Research head of research Imran Yassin Mohd Yusof (pic) said any NIM compression this year would be benign compared with 2020.

“With no cuts to the OPR, it will provide reprieve for banks’ NIM this year.

“Nevertheless, we opine should there have been any further OPR cut this year; the impact to banks’ NIM will likely be muted minimal deposit competition, ” he said in a note yesterday.

Imran expected that banks’ credit cost would start normalising this year, while income would stage a rebound on the back of a potential OPR hike in the final quarter of 2021.

“Therefore, we expect earnings will improve in 2021. Hence, we maintain our ‘positive’ recommendation for the sector.

“Nevertheless, we recognise that there is short-term pressure that banks will have overcome.

“Primarily, the potential stress on asset quality, but we opine that banks in general will be able to weather it, ” he said.

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