Investment Research

• Quantum expected, timing not quite
In yet another surprising move, Bank Negara Malaysia (BNM) reduced the overnight policy rate (OPR) and statutory reserve requirement (SRR) again in its Monetary Policy Committee meeting yesterday, by 50bps and 100bps respectively to 2.0% and 1.0%. Ceiling and floor rates for the OPR are correspondingly reduced to 2.25% and 1.75% respectively. While this move had been anticipated, the timing wasn’t quite. BNM cited the fastdeteriorating economic and financial environment globally and its impact on the country for its decision to act, in support of domestic demand until conditions in the global economy show signs of normalization. Just to recap, the OPR has been reduced by 150bps in the last 3 consecutive policy meetings.

• Margin pressures
In the recent OPR move, banks did not reduce lending rates (BLRs) by a similar quantum, most only opting to cut it by 55bps on average. Banks with a higher amount of floating rate loans will obviously be impacted more negatively as it will be re-priced lower almost instantaneously while deposits will have a lag before they are adjusted. Net interst margins will contract, depending on the adjustment in deposit rates and the respective banks’ interest rate gap profiles. Though we do expect earnings to be affected by this move, we make no changes to estimates as we had already factored in futher erosions in margins in our recent revisions. We will however be monitoring moves of respective banks closely for management’s repricing decisions. Banks’ earnings will be impacted negatively by about 3-4% for every 5bps in net interest margins contractions.

• Net impact slightly negative, but within expectation
The cut in SRR is expected to release another RM5.7bn to the system, one which is now flush with liquidity. It will naturally lower the banks’ cost of funds, and minimize some of the impact of the OPR and BLR cut (c. 3-5bps).
The expectations are that the lower interest rate environment will help sustain domestic consumption and mitigate rising loan defaults in the system as the economy visibily weakens. Recent quarterly reportings by some of the banking groups have shown surprising resilience in asset qualities, though some are starting to show signs of strain.

• Valuations relatively undemanding
We continue to favour Public Bank for its attractive dividend yields and strong management, AMMB Holdings and Bumiputra-Commerce Holdings for stronger recoveries upon improvement in market conditions. The hold calls on Hong Leong Bank and Maybank remain unchanged.