PETALING JAYA: Any rate cuts for the Overnight Policy Rate (OPR) are positive for cyclical sectors such as property, automotive and consumer due to the increase in the consumers’ disposable income, according to CGS-CIMB.
“However, we do not expect the impact to be significant,” its analyst Ivy Ng Lee Fang said in a strategy note today.
She added that a rate cut is also positive for companies with high ringgit borrowings as it will result in lower interest expense.
Nevertheless, an OPR cut is negative for banks as the downward re-pricing of lending rates had historically been wider than the decrease in deposit rates, leading to potential narrowing in the banks’ net interest margins.
It is also negative for com-panies with high net cash balances as it will result in lower interest income.
Ng said the research firm’s economist has flagged the possibility of a 25 basis points (bp) cut in Bank Negara Malaysia’s OPR from the current 3.25% to 3% in 2019, following a more-dovish-than-expected shift in the US Federal Reserve’s monetary policy guidance recently.
Based on the assumption of a 25bp reduction in base rate and base lending rate, and an average of 22bp reduction in fixed deposit rates, it estimates that a 25bp cut in OPR would lower banks’ 2020 net profit by 3.2%.
The impact of a rate cut would be biggest on Alliance Bank and BIMB Holdings due to their high floating rate loan ratio (over total loan) of 90.5% and 88.1%, respectively, projected for 2020.
A 25bp rate cut would trim Alliance Bank and BIMB Holdings’s FY20 net profit by 7-8%.
Ng said the impact would be smallest for AMMB Holdings, as its floating-rate loan ratio is the one of the lowest among peers at 71.6% for FY20.
“We expect a 25bp cut in OPR will reduce AMMB’s FY20F net profit by 2.3%.
“The impact from the rate cut would also be relatively smaller for Maybank and Public Bank (compared to most other banks) partly because some portion of their loans (42% Maybank; 7% Public Bank as at end-Dec 2018) are from their overseas markets, which will not be impacted by the rate cut in Malaysia,” she added.
On the rate cut potential impact to KLCI earnings, Ng said the firm is of the view that a 25bp OPR cut may be a short-term positive for the market from a sentiment perspective.
She noted that it is likely to be negative for overall KLCI earnings, as the impact from the net interest margin squeeze on banks appear to be higher than potential interest savings for KLCI constituent companies.
