At 3pm yesterday (22 Jan), Bank Negara Malaysia (BNM) announced its 0.25% cut in the overnight policy rate (OPR) to 2.75%. In a report released on the same day, Macquarie Equities Research (MQ Research) summarized the event, stating that further rate cuts are unlikely.

Key Points

• BNM’s monetary policy committee (MPC) cut the OPR by 0.25% to 2.75%. In line with consensus expectations but contrary to MQ Research’s no-cut base case.
• Banks have minimised long-dated deposits in anticipation, mitigating net interest margin (NIM) hit vs May ’19 OPR cut. Most sensitive to a cut: Public>Maybank>CIMB.
• This rate cut will enhance (but not drive) growth, which still leans on commodities & fiscal stimulus. Low risk of further cuts, in MQ Research’s view.

Event

• The MPC of Malaysia’s central bank, BNM, yesterday met for the first time in 2020 and decided to cut the OPR by 0.25% to 2.75%. The last -0.25% cut was in May 2019.

Impact

• The NIM hit from the -0.25% OPR cut should be milder than the May 2019 cut, as the banks have been trimming long-dated fixed deposits (Fig 1). Below, MQ Research’s sensitivity flags Public as the most exposed to a further rate cut, largely from its smaller non-interest income base. Unlike the FY19, MQ Research also expects corporate credit demand to rebound and offset NIM pressure.

Outlook

• MQ Research doesn’t expect the OPR cut will drive growth in 2020, but rather enhance it. Commodities (CPO and oil) are already moving in the right direction and the US-China phase 1 deal will be constructive for exports recovery. The final piece of the puzzle remains timely execution of fiscal stimulus by the government, following a relatively weak FY19. Considering the aforementioned drivers, MQ Research feels further rate cuts are unlikely. Some positive indicators are already beginning to emerge in 4Q19, with purchasing managers index (PMI) and industrial production index (IPI) stabilising. Note: MQ Research’s house view is for no rate cuts by the US Federal Reserve in 2020.

12-month Target Price Methodology

• MAY MK: RM9.00 based on a Price to Book methodology
• PBK MK: RM19.90 based on a Price to Book methodology
• CIMB MK: RM6.15 based on a Price to Book methodology

Source: Macquarie Research - 23 Jan 2020