KUALA LUMPUR (July 10): A reduction in Malaysia’s benchmark interest rate will hurt smaller banks the most due to their greater reliance on income from interest charged on loans than their larger peers, analysts said.
Bank Islam Malaysia Bhd (KL:BIMB), and Alliance Bank Malaysia Bhd (KL:ABMB) would be most vulnerable to changes in overnight policy rate that will directly affect their margins, according to research houses including Public Investment Bank and RHB Research.
“While credit demand in theory should benefit from this rate cut, we are of the view that loans growth may taper, given slower economic growth dragged by rising global-trade uncertainty,” said Public Investment Bank.
The house slashed earnings forecasts for banks under its coverage by around 3%-4%, flagging that the impact will also be the most severe on Alliance Bank, with variable rate loans making up 84% of its lending.
A lower policy rate shrinks banks’ net interest margins — a measure of profitability from interests charged on loans after deducting returns paid to depositors. While floating-rate loans are repriced shortly after a policy-rate change, the interests on deposits only adjust at maturity.
Competition for deposits, meanwhile, remains intense in a country of 30 million, where around three dozen local and foreign lenders jostle for business, keeping up interest expense pressure on banks.
Wednesday’s cut follows an earlier measure by Bank Negara Malaysia to slash the statutory reserve requirement ratio, which stipulates the amount of cash that lenders must keep in reserve, to its lowest in 14 years, in a bid to boost liquidity in the banking system, providing some relief to earnings.
For RHB Research, Bank Islam would be most sensitive due to its high proportion of floating-rate loans and a relatively large current-account-savings account mix.
“Broadly, we find that the earnings of smaller banks are more sensitive to rates” due to a less diversified income mix and higher operating leverage, the house said.