Malaysia Banks earnings under pressure

Already facing poor earnings prospects in the current challenging economic environment, banks in Malaysia will likely be squeezed further by Bank Negara’s unexpected move to cut the overnight policy rate (OPR). (Reported thestar.com.my)

Analysts said they expected banks to see further margin compression resulting from the lower benchmark interest rate. “The cut in OPR is negative for banks, as their margins will be pressured,” said an analyst with a local bank. “This is because every time there is a cut in the OPR, the resultant decline in their base rates, which is their benchmark lending rates, tends to always be more than the resultant decline in the deposit rates that they offer their customers,” the analyst told StarBiz.

Going against market expectations, Bank Negara had cut the OPR, which is the rate at which banks lend to each other, by 25 basis points (bps) to 3% yesterday. This was the first rate cut since 2009, while the statutory reserve requirement ratio was left unchanged at 3.50%.

The central bank’s stance was seen as a preemptive move to mitigate the increasing downside risks to Malaysia’s economic growth. “The outlook for the banking sector remains uninspiring… the lower interest rates will unlikely help stimulate loan growth, for one thing, because as it is, the household debt level in Malaysia is already high, and business sentiment remains rather sluggish,” said a market observer. “The sector’s net interest margin (NIM) will continue its downward trend, posing further downside risks to earnings,” he added.

The industry’s NIM had been on a declining trend due to competition for deposits. From the average of 2.33% in 2014, the sector’s NIM has fallen to 2.17% .

Meanwhile, Kenanga Research, in its report, said it would expect Malayan Banking Bhd (Maybank), AMMB Holdings Bhd (AmBank) and Affin Holdings Bhd to be the least affected by the downward revision in the OPR. “To note, for May 2016, the percentage of current account, savings account (CASA) showed a slight improvement, with CASA marginally higher at 25.4%, compared with 25.2% in the preceding month, but excess liquidity fell to 11.7% from 12.8% in April,” Kenanga Research said. “If the OPR is revised downwards, it will negatively affect NIMs, but Affin, AmBank and Maybank should be able to mitigate this impact better, given that their fixed rate lending comprises around 30% of their total loan portfolio (versus the industry average of 24%),” said the brokerage.

Kenanga Research was among the 17 out of 18 analysts polled by Bloomberg that were expecting Bank Negara to keep the OPR unchanged at 3.25% at the monetary policy committee’s (MPC) meeting yesterday, while some economists had expected the cut to come only in the September meeting.

“While we had pencilled in a 25-bps rate cut for September, it appears that Bank Negara has decided to be pre-emptive in countering the rising downside risks to growth,” Nomura Global Research said. “These risks stem primarily from the impact of Brexit, which it cited in its statement. Indeed, the monetary policy statement sounded decidedly more downbeat on the economic growth outlook than previous statements (March and May), by stating that exports are likely to remain weak,” the brokerage explained.

Bank Negara, in its policy statement, emphasised that “the MPC will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation”, which differed from the statements from the last eight decisions, whereby the policy stance was stated as “accommodative and supportive of economic activity”. “In our view, this leaves the door open to more rate cuts if the impact from the Brexit is more severe than currently assessed, in addition to other potential external risk events,” Nomura said.

AllianceDBS Research, which recently cut its 2016 growth forecast for Malaysia to 4.1% from its earlier estimation of 4.5%, regarded the OPR cut as pre-emptive easing to support domestic consumption to offset the expected slowdown in external trade and investment.

“We sense that Bank Negara is increasingly concerned about the external downside risk impact on Malaysia’s exports and foreign investment inflow,” AllianceDBS Research chief economist Manokaran Mottain said. “We believe that the pre-emptive easing is targeted to ensure that private consumption (which accounts for around 52% of Malaysia’s gross domestic product) growth does not fall short of Bank Negara’s projected 5.1% expansion this year (versus 6% last year) to offset the expected weakness in exports and investment growth,” he explained.

Meanwhile, RHB Research did not discount another round of OPR cut this year. “If economic growth continues to slow more than expected, this may cause the central bank to reduce the OPR by another 25bps in the coming meetings. “On the other hand, it would be sensible for Bank Negara to stand pat should economic activities improve and adopt a wait-and-see approach if performance of the economy does not stray too far from projections,” it added.

Bank Negara pointed out that global growth prospects had become more susceptible to increased downside risks in light of possible repercussions from Brexit.

International financial markets could also be subject to greater volatility, and in this light, global monetary conditions were expected to remain highly accommodative, the central bank said. “For Malaysia, domestic demand continues to be the main driver of growth. Private consumption will be supported by growth in income and employment, and measures implemented by the Government. “While investment in the oil and gas sector is moderating, overall investment is expected to be supported by the ongoing implementation of infrastructure projects and capital spending in the manufacturing and services sectors,” it added.

According to the central bank, exports are projected to remain weak following more subdued demand from Malaysia’s key trading partners. “Overall, while the domestic economy remains on track to expand in 2016 and 2017, the uncertainties in the global environment could weigh on Malaysia’s growth prospects,” it said.

MIDF Research said: “The weak external factor has been the main reason for the rate cut. However, we opine that the weak external factor alone does not warrant a rate cut, but rather the possibility of the weak global demand eventually affecting the domestic income, employment and investment level. “As Bank Negara has been reiterating that our domestic consumption will continue to be supported by growth in income and employment, it is vital for us to ensure our domestic economy remains strong for the income and employment level to support our economic growth,” said the brokerage.