Interest rate cut: Winners and losers
THE STAR
Friday, 24 Jan 2020
By P. ARUNA
rate cut
PETALING JAYA: While Bank Negara’s decision to cut the Overnight Policy Rate (OPR) by 25bps to 2.75% was widely unexpected by analysts, the general reaction to the move was that the impact – on most sectors – would be minimal.
Ahead of the cut, only two out of 26 analysts involved in a Bloomberg poll had predicted that the rate cut would take place.
Analysts are generally of the opinion that banks will be the biggest losers as a result of the rate cut, although they say the impact is likely to only be short-term.
They are also mildly positive on the impact of the cut on the automotive and property sectors.
Below is a compilation of their views on the potential winners and losers:
Losers: Banks
While the rate cut is generally expected to result in better affordability, analysts are not convinced that it could result in strong loan growth for banks.
UOB Kay Hian Research noted that the tepid growth in business loans faced by the sector is partly attributed to policy uncertainties, as evidenced by weak domestic private investment trends last year.
As such, it said the OPR cut may not be sufficient to stimulate industry loans growth.
This is as compared to having greater certainty on domestic policies and the multiplier effect from mega infrastructure projects, which would have a greater impact on sentiment and thus, loans growth.
Alliance DBS Research said while the cut implies better affordability and potential alleviation of asset-quality concerns, it remains to be seen of the move would spur loan demand.
It noted that the rate cut last year did little to alter loan growth momentum.
As for banks’ net interest margins (NIM), it expects to see compression in the near term, although the impact would be mitigated by a shift in fixed deposit profiles towards shorter tenures (of up to six months) for major banks.
TA Research said there is room for another rate reduction in the second half, and noted that the banking sector’s earnings would be adversely impacted by this possibility – resulting in about 4% to 6% reduction in earnings.
“A reduction in rates is typically not positive for banks as loan yields would immediately be adjusted accordingly.
“That said, banks with high variable rate loan mix such as Alliance, RHB Bank and CIMB should be affected most, in our view, ” it said.
For CGS-CIMB Research, the 25bp cut in OPR is expected to lower its FY20-21 net profit forecasts by about 2.2% for the full-year for Malaysian banks under its coverage, assuming a reduction of 25bp in both lending and FD rates.
“Based on our simulation, the rate cut would have the biggest negative impact on Alliance Bank and BIMB Holdings
in view of their high floating-rate loan ratios (over total loans) of 82% and 88%, respectively, ” it said.It expected the cut to reduce Alliance Bank’s and BIMB’s FY20-21 net profit by about 6%, while Public Bank and AMMB Holdings would likely see the least impact as their floating-rate loan ratios are relatively lower at 71%-77%.On the contrary, MIDF Research expected the impact of the rate cut on banks’ earnings and full-year net income to be muted - based on previous trends.
“While we do not discount a short term compression to NIM but it will likely be only for a quarter and will recover rather quickly, ” it said.
Winners: Property and REITs, automotive players
The reduced OPR rate will reduce borrowing costs for house buyers as well as as for property developers, and could spur home building and buying activities, said TA Research.
Based on its sensitivity analysis, a 25bps cut in lending rate could decrease monthly repayment of a 30-year loan by 2.9%, assuming the banks adjust their base rates (BRs) accordingly.
“Although we note a 2.9% decrease in monthly repayment alone is insufficient to convince consumers to commit to big ticket purchase, we expect consumer sentiment to improve, as lower instalment on loans will free up some cash flows for future spending and improve repayment capabilities, ” the research house said.
An easing interest rate environment, it said, would also result in lower borrowing costs for REITs to acquire future assets.
It added that interest rate cuts could also enhance the attractiveness of REITs as the yield of other fixed-income instruments decline.
Reiterating its “overweight” stance on the property sector, the research house believes the property market is showing signs of bottoming out and that developers should catch up in terms of share price movement.
“With various efforts to spur housing market activities, we believe there are trading opportunities to buy undervalued developers, ” it said.
CGS-CIMB, meanwhile, believes the impact on the property sector will be negligible.
It estimated that every 25bp reduction in borrowing rate would reduce the monthly instalment for mortgage loans by 1%-3%, depending on the loan tenure.
“Homebuyers’ purchasing power will likely increase in tandem but we expect the upside to be limited, especially for properties in the affordable range of RM300,000-RM500,000, ” it said.
Based on its sensitivity analysis, every 25bp cut in borrowing rate would reduce the monthly housing loan instalment by only about RM32-RM68 or raise a buyer’s eligible loan amount by RM3,000 to RM15,000.
“While the sentiment to purchase properties will likely improve due to lower loan instalments, this could be offset by Malaysia’s muted GDP growth and slowing household income trend, ” it said.
As for the automotive sector, it also sees minimal direct impact to total industry volume (TIV), based on historical data.
Nevertheless, it expects the latest 25bp rate cut could facilitate its estimate of a 1.8% year-on-year TIV growth for the auto sector in 2020, given the more favourable environment for Malaysian consumers.
MIDF Research said the rate cut should be positive for underlying auto demand, but expects sector earnings to be offset by a weaker ringgit as an implication.
