PETALING JAYA: The surprise move by Bank Negara to reduce the overnight policy rate (OPR) to 2.75% – the lowest level in nearly nine years – has rattled banking stocks as margin compression fears kick in.

Major banking counters such as PUBLIC BANK BHD (-2.36%), HONG LEONG BANK BHD (-3.56%), CIMB GROUP HOLDINGS BHD (-1.95%) and MALAYAN BANKING BHD (-0.58%) yesterday saw selldowns, which as a result dragged down the FBM KLCI by 9.35 points or 0.59% to 1,577.98 points.

The Financial Services Index was the worst performing indice among other indices as it dropped by 1.37%, particularly after 3pm when the decision by Bank Negara’s Monetary Policy Committee (MPC) on the OPR was announced.

The investor jitters post-rate cut is not surprising.

While a cut in OPR lowers loan repayment costs for borrowers such as households and businesses, lenders or financial institutions generally take a hit on their profitability as they make less interest income on loans.

For context, banks make a profit through the difference between the interest income generated by banks and the interest paid out to depositors.

This is referred to as net interest margin (NIM).

MIDF Research analyst Imran Yassin Yusof believes that the latest round of OPR cut could likely have a muted impact on the Malaysian banking sector.

Imran told StarBiz that banks were largely prepared for rate cuts as they expected two OPR cuts last year.

However, the central bank only slashed the benchmark interest rate once by 25 basis points (bps) to 3% in May 2019, down from 3.25%.

He pointed out that the competition for fixed deposits towards the end of 2019 was not as intense as compared to before, likely due to expectations of further OPR cuts.

“Fixed deposits mean higher costs for the banks. The fact that they have not loaded a lot of fixed deposits last year indicates that they are looking at further rate cuts and to lower costs, ” he said.

Imran said banks would see a NIM compression in the first quarter of 2020, although the situation would recover in the following quarter as banks adjusted the rates for loans and deposits.

“Banks with regional exposure such as Maybank and to a certain extent, CIMB, as well as those with lower variable rate loans as a portion of their loan books will be least affected by the OPR cut.

“However, Alliance Bank Malaysia Bhd would likely be mostly affected as about 90% of its loans are at variable rates, ” he said.

The move by the MPC yesterday to lower the OPR by 25 bps was against market consensus, which predicted the rate to remain at 3%.

An earlier poll by Bloomberg showed that 24 out of 26 economists expected the OPR to remain unchanged. Only MIDF Research’s Muhammad Zafri Zulkeffeli and Nomura Singapore Ltd’s Euben Paracuelles had forecast a rate of 2.75%.

The central bank remains cautious on the economic outlook, as evident in its MPC statement yesterday, and said the OPR adjustment “is a pre-emptive measure to secure the improving growth trajectory amid price stability”.

“At this current level of the OPR, the MPC considers the stance of monetary policy to be appropriate in sustaining economic growth with price stability.

“For 2019, growth will be within the projected range. For 2020, growth is expected to gradually improve, with continued support from household spending and better export performance, ” it said.

“Overall investment activity is expected to record a modest recovery, underpinned by ongoing and new projects, both in the public and private sectors. However, downside risks to growth remain.

“These include uncertainty from various trade negotiations, geopolitical risks, weaker-than-expected growth of major trade partners, heightened volatility in the financial markets, and domestic factors that include weakness in commodity-related sectors and delays in the implementation of projects, ” it added.

The central bank expects headline inflation this year to remain modest but average higher than last year’s 0.7%. This is subject to global oil and commodity price developments and the timing of the lifting of the domestic retail fuel price ceilings.

Socio-Economic Research Centre executive director Lee Heng Guie said the think-tank had expected a rate cut in the MPC’s March meeting, but not as soon as the Jan 21-22 meeting.

“I see the drop in OPR as a move by Bank Negara to address the weakness in the gross domestic product figures for the fourth quarter of 2020, which has been signalled in the export and industrial production index data.

“The lower OPR will provide monetary policy support to the economy but this must also be complemented by the government’s more efficient fiscal spending to stimulate the economy.

“I don’t see the need for more OPR cuts this year, ” he said.

On the other hand, AmBank Group chief economist Anthony Dass said there is room for another 50 bps cuts in 2020.

This, if executed, will lower OPR to 2.25%.

“Room for more rate cuts cannot be ruled out. Much will depend on the performance of business activities, non-performing loan direction, external environment as well as the ringgit outlook, ” he said.

When asked whether the OPR cut will increase loan growth in Malaysia, he said he expected loan growth to be around 4% to 5% on the basis that the GDP grew around 4.6%.

“It will depend on whether corporate loans will pick up, as household loans are likely to remain soft. The approval for household loans still depends on credit record quality, ” he added.

In a statement yesterday, CIMB Group chief executive officer Tengku Datuk Seri Zafrul Aziz described the OPR cut as “timely”, in view of benign inflation and other modest key economic indicators.

“We hope the 0.25% reduction in applicable rates will not only ease the burden of borrowers but also spur further lending, investments and consumption to support the country’s economic growth, ” he said.

The bank will reduce its base rate and other rates for fixed deposit and loans by 25 bps, beginning Jan 30.

Bank Negara reduced the benchmark OPR on May 7,2019 by 25 bps to 3%, the first downward revision since July 2016.

The MPC had then avoided a rate cut at its subsequent meetings in July, September and November. However, on Nov 8, Bank Negara lowered the Statutory Reserve Requirement ratio to 3% from 3.5% effective Nov 16.

The last time OPR ranged below 3% was in 2011 at 2.75% before it was raised to 3% in May 2011.