OPR cut likely to have minimal impact on banks

PETALING JAYA: Bank Islam Malaysia Bhd and Alliance Bank Malaysia Bhd will be the hardest hit should Bank Negara decide to cut its benchmark interest rate by 25 basis points (bps) this year.

This is largely because of both banks’ high proportions of floating-rate loans and current accounts-savings accounts, according to an analysis by CGS International Research (CGSI Research).

As for the overall banking industry, CGSI Research said a 25-bps reduction in the overnight policy rate (OPR) to 2.75% will only have a minimal negative impact on the bottom line in the financial year of 2026 (FY26).

“Based on our analysis, every 25-bps cut in the OPR will trim the total FY26 net profit of the Malaysian banking sector by only 0.2% (for full-year effect), with Bank Islam’s and Alliance Bank’s FY26 net profit the hardest hit by 4.1% and 2.3%, respectively.

“On the flip side, Affin Bank Bhd and AMMB Holdings Bhd could benefit from the OPR cut the most, with a positive impact on FY26 net profit of 3.3% and 1.2%, respectively, based on our analysis.”

Bank Negara’s Monetary Policy Committee will decide today on whether a cut in the OPR is necessary, given the global uncertainties.

In the event of an OPR cut, CGSI Research believes floating rate loans will be repriced downward immediately (within one to two weeks), while fixed deposits (FD) will be repriced downward upon the maturity of the FDs (which could take up to 12 months for most FDs).

The timing difference for repricing should cause banks’ net interest margins to narrow immediately after the OPR cut but subsequently gradually recover as FDs continue to be repriced downward upon maturity.

“In our view, the negative impact of this is likely to be offset by potential gains in banks’ fixed income securities, as OPR cuts reduce bond yields and lift bond prices.”

“We continue to be ‘overweight’ on Malaysian banks, premised on potential re-rating catalysts from our expectations of write-backs in management overlays and an increase in dividend payout ratios.

“The sector is also supported by an attractive dividend yield of 5.8% for 2025,” stated CGSI Research.

Meanwhile, CIMB Securities has maintained its “neutral” rating on the banking sector. However, it has “buy” ratings on Alliance Bank, Public Bank Bhd and RHB Bank Bhd, mainly for dividend yield.

“We expect banks’ share prices to trade rangebound in the next few months until there is greater clarity on the external reciprocal tariff situation,” it said in a note.

CIMB Securities also pointed out that leading loan indicators were more normalised in March 2025, following the January to February 2025 Chinese New Year holiday season effect.

Loan growth held steady at 5.2% year-on-year (y-o-y), but deposit growth continued to lag at 3.0% y-o-y in March 2025.

Asset quality improved for the second consecutive month.

Gross impaired loans improved by 1.9% month-on-month or RM629.3mil in March.

Furthermore, the gross impaired loans ratio was stable at 1.42%, while loan loss coverage remained high at 91.2% in the month.