KUALA LUMPUR: CIMB Equities Research expects the 25 basis points cut in overnight policy rate (OPR) to reduce banks’ FY20F net profit by about 3.2%.

“We estimate the 25bp OPR cut to have the most impact on BIMB Holdings and Alliance Bank, at 7%-8% of their FY20F net profit,” it said on Wednesday.

The research house stayed Neutral on the sector due to concerns over margin erosion and slower loan growth.

On Tuesday, the Monetary Policy Committee (MPC) cut the OPR by 25bp, from 3.25% to 3%. Within the next one to two weeks, banks will likely announce a reduction in their lending rates (base rate and base lending rate) and fixed deposit (FD) rates. 

“We expect the lending rate to be lowered by 25bp and FD rates to be cut by an average of 20-23bp.

“The OPR cut would be negative for banks’ margins as the lending rate would be reduced by a wider magnitude compared to the cut in FD rates. We estimate that the 25bp cut in OPR would lower banks’ FY20F net profit by about 3.2% (full-year impact), assuming a reduction of 25bp in lending rate and an average cut of 22bp in FD rates,” it said.

CIMB Research said based on its 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 90.5% and 88.1% respectively projected for FY20F. 

The 25bp OPR cut would reduce Alliance Bank’s and BIMB’s FY20F net profit by 7%-8%, based on its estimates. 

On the flipside, the rate cut has the least impact on AMMB Holdings, as its floating-rate loan ratio is one of the lowest in the sector at 71.6% (for FY20F).

Three banks under its coverage had increased their lending rate (base rate or BR) in the past few months which are (1) RHB Bank (BR +10bp to 4% on 5 Apr 19), (2) Hong Leong Bank (BR +10bp to 4.13% on 10 Jan 19) and (3) Bank Islam (BR +13bp to 4.03% on Nov 13, 2018.

“We expect the BR hike to (partly) offset the negative impact from the OPR cut.

“We retain our Neutral call on banks due to the concerns over margin contraction (arising from OPR cut and deposit competition) and the slowdown in loan growth. 

“However, we think that banks’ share prices would be supported by the attractive dividend yield of 4.1% for the sector. RHB Bank remains our top pick for the sector,” CIMB Research said.