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PETALING JAYA: Banks are not likely to take an additional hit to earnings and Bank Negara is expected to keep its current key benchmark interest rate at 1.75% at tomorrow’s Monetary Policy Committee (MPC) meeting.
The current official overnight interest rate (OPR) is at its all-time low of 1.75% since 2004, with a total cut of 125 basis points (bps) so far this year.
A Bloomberg survey of 21 economists showed a median forecast of 1.75%, indicating that the OPR will likely hold.
Net interest margin (NIM), a measure of the difference between interest income generated by banks and interest paid to depositors, will not be affected, along with banks’ earnings.
Malaysian banks’ profits have taken a hit this year, weighed down by large modification losses, preventative provisions and a significant margin squeeze.
The modification fees came when banks are unable to charge interest on installment loan installments and Islamic financing under the six-month moratorium that ends this month. At the same time, margins have been severely squeezed by the numerous cuts from OPR.
Standard Chartered Global Research, in a note, expects the central bank to hold the OPR at 1.75%.
Cumulative cuts of 125 basis points after the last four meetings have already brought the key policy rate below the 2% low set during the global financial crisis (GFC).
It attributes the unchanged OPR to the reopening of global economies (including Malaysia’s), historic low rates, and pandemic restrictions still in place. The research firm said that further rate cuts may have only a marginal impact and reduce future policy space.
Bank Islam and Ambank Group expect, however, a 25 bp cut in OPR. Bank Islam chief economist Mohd Afzanizam Abdul Rashid told StarBiz that he expects a 25 basis point cut as economic uncertainty remains high.
AmBank Group chief economist Anthony Dass, who is also a member of the Economic Action Council secretariat, said that uncertainties about the pandemic continue with fears of a second wave, which may be more severe.
“Therefore, a reduction in the current low-inflation environment would provide a positive boost to spending and help ease, to some extent, any increasing pressure on NPLs. The equity market could also benefit from retail purchases, ”he added.
Meanwhile, AmInvestment Bank, which maintains its neutral stance on the banking sector, said the sector’s underlying NIM fell 11 basis points qoq (on a quarterly basis) in the second quarter due to the 50 basis point OPR cut in May.
For 2020, the research house said that it expects the sector’s NIM to compress by 14 basis points, while a fixed interest margin is expected on average for 2021.
Banks’ six-month (2020) calendar core earnings growth fell 13.4% YoY (YoY) due to lower interest income from back-to-back OPR cuts and higher provisioning.
This, he noted, was despite higher operating and investment income boosting banks’ non-financial income (NOII) over a six-month period.
“The earnings of Maybank, Public Bank, RHB Bank, Hong Leong Bank, Alliance Bank and BIMB were within our expectations, while those of CIMB were below our estimate. Meanwhile, AMMB’s core earnings were above the consensus projection, ”said the research house.
AllianceDBS Research takes a bearish view on 3% loan growth for its 2020 projection. It expects banks to remain conservative in their underwriting processes given economic uncertainties and lingering asset quality concerns.
“In the case of SME loans, momentum is likely to slow as aid services run out and loan defaults end, requiring a stronger pace of economic recovery in the second half.
“The biggest changes in bank earnings will continue to be in borrowing costs, and October and December will be crucial in determining the degree of conservatism required for additional provisions,” the brokerage said.
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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