Bank Negara Malaysia (BNM) is expected to make another 25 basis points (bps) cut in the overnight policy rate (OPR), as most central banks globally are cutting their interest rates to address the impact of the COVID-19 pandemic.
AmInvestment Bank Bhd’s research team (AmInvestment) emphasized this in its banking sector report, averring that limited options are seen from the fiscal and monetary perspective to address the external uncertainties brought by the pandemic, reported The Borneo Post.
“We see the potential for another cut of 25bps, thus lowering the OPR further to 2.25% from 2.5%. This could occur in the next Monetary Policy Committee (MPC) meeting on 5 May 2020,” it said.
It can be recalled that the Bank of England recently reduced its benchmark rate by 50bps to 0.25%, while the US Federal Reserve unveiled an emergency rate cut of 100bps on 15 March, in addition to its earlier rate reduction of 50bps, lowering the Fed rate to 0.25% from 1.25%.
In this measure, “Malaysia is not spared”, said AmInvestment.
Cutting the OPR by another 25bps in May 2020 will bring Malaysia’s OPR cumulative reduction to 100bps since 2019, which will be close to the 150bps rate cut seen during the 2008–2009 crisis.
AmInvestment noted that there will be lesser monetary flexibility to further reduce the OPR because doing so will further weaken the domestic currency and will add pressure to inflation due to higher import cost.
The ringgit currently stands at 4.37 against the US dollar, as opposed to an average of 3.38 during the 2008-2009 financial crisis.
“Nevertheless, the possibility of further cuts to the SRR in addition to the 50bps reduction seen in November 2019 will not be ruled out,” noted AmInvestment Bank.
As to its impact on banks, AmInvestment believes an OPR change’s impact “will depend on the timing of its occurrence and it will be short term (estimated one to two quarters) with FD rates eventually repriced down to catch up with the changes in lending rates”.
However, the 25bps reduction will likely be minimal on banks’ earnings by 1-2%. Their net interest margins (NIM), on the other hand, will be affected by 2-4%.
Potential downside risks to banks’ provisions, however, are imminent should weaker oil prices and COVID-19 play out longer.
While the 2-3% exposure revealed by most banks to sectors directly affected by the pandemic (tourism, airlines, wholesale, hospitality, retail trade and manufacturing) appear to be comforting, concerns were raised on the banks’ indirect exposures to sectors which are not usually identified as such.
“These borrowers may not have access to the relief BNM facility which is capped at RM2 billion in total, offering a low interest rate of 3.75% or to be allowed a moratorium period of six months permitted by BNM to defer repayments or even be restructured and rescheduled,” said AmInvestment Bank.
For instance, in the oil and gas sector, most banks have already been vigilant and monitors the sector closely after the earlier drop in oil prices. In fact, banks’ exposure to this segment have been gradually declining.
Maybank’s exposure to the sector has been reduced to 2.8% as of December 2019, while CIMB has an exposure of 2.3%.
For RHB Bank, its exposure to this sector has been lowered to 2.4% in December 2019, as opposed to 2.8% in December 2018.
Public Bank, Hong Leong and Alliance Bank’s exposure to the oil and gas sector, on the other hand, is minimal, making up less than 1.0% of their respective total loans.