6 hours Ago
PETALING JAYA: Banks could face margin compression if the economy slows down and Bank Negara cuts its overnight policy rate (OPR) by 25 basis points (bps). This comes as economists have become more cautious about the global macroeconomy amid President Donald Trump’s reciprocal tariff policies. In a report, Hong Leong Investment Bank Research (HLIB Research) said post-tariff “Liberation Day,” investor sentiment has waned markedly.
Underscoring the growing unease, the research house said markets are now assigning a 50% to 60% chance of a US recession, while expectations for federal funds rate cuts have increased. Additionally, markets are now pricing in three rate cuts for 2025 (versus HLIB Research’s expectation of two). Compounding concerns, the US yield curve has once again inverted, a historically reliable recession indicator.
“Accordingly, our economics team has slashed Malaysia’s 2025 gross domestic product growth forecast to 4% from 4.9%. “Also, they flagged that Bank Negara may potentially reduce the OPR by 25bps to 2.
75% in the second half of 2025 to support growth amid external downside risks,” HLIB Research said. Hence, the research house pointed out that banks could face margin compression, but it believes the impact this time may be more contained. “Although banks typically face margin compression following an OPR cut, we believe the impact this time may be more contained compared to prior unforeseen rate reductions.
“This is primarily because banks are likely to adopt a more proactive stance in anticipation of potential easing by shortening fixed deposit (FD) tenures to enable faster repricing at lower cost and moderating FD growth to avoid overexposure ahead of rate adjustments.” Additionally, pricey campaign FD rates may moderate within six to nine months post-OPR cut, as banks capitalise on the opportunity to stretch their net interest margin (NIM) expansion. Going by this, HLIB Research estimated that every 25bps cut in the policy rate would lead to a 5bps to 6bps contraction in sector NIM, with earnings forecasts reducing by 3% to 4%.
“ BIMB Holdings Bhd and Alliance Bank Malaysia Bhd would lose the most, while Public Bank Bhd and Malayan Banking Bhd (Maybank) would be the least affected.” Looking beyond NIM, the research house said it remains constructive on the broader top-line outlook for both loan growth and non-interest income (NOII). Even at the peak of the Covid-19 pandemic, when Malaysia was under a nationwide lockdown, system loans still recorded 2.
6% year-on-year (y-o-y) growth, showing credit demand resilience, it added. “We are not overly worried about potential weaknesses, since the banking sector is entering this cycle from a position of strength. “As at the fourth quarter of 2024, the sector’s loan loss coverage stood at 105%, which is notably higher versus the pre-pandemic level of 89%,” it pointed out.
Meanwhile, RHB Research said while the US reciprocal tariffs have injected further uncertainty into the market, the 90-day pause provides investors with an opportunity to reposition. The research house prefers large-cap banking stocks over smaller ones, which are more sensitive to rate cuts and have higher exposure to manufacturing and trade. RHB Research has trimmed sector earnings forecasts for financial year 2025 (FY25) and FY26 by 2% and 3%, respectively, mainly due to lower operating income.
Its FY25 sector profit after tax and minority interest growth projection now stands at 3.5% y-o-y (from 6.1%).
“Until the tariff overhang is lifted or a market clearing price level is reached, a ‘neutral’ (from ‘overweight’) stance is appropriate, in our view,” said RHB Research. The research house has Maybank, Hong Leong Bank Bhd and CIMB Group Holdings Bhd as sector picks..
