Interest rate cut no dampener on banks

PETALING JAYA: The 25-basis-point (bps) benchmark interest rate cut by Bank Negara on Wednesday is seen as having limited impact on banks’ bottom lines for now, given the injection of liquidity into the financial system from the cut in the statutory reserve requirement (SRR) announced in May.

Bank Negara cut the overnight policy rate (OPR) by 25 bps to 2.75% as a pre-emptive move to cushion a slowdown in the economy, given the volatility brought on by uncertain US tariff policy.

The central bank had also cut the SRR, which manages liquidity in the banking system by 1% from 2% in May to ensure liquidity in the system.

RHB Research, which has a “neutral” call on bank stocks, said the impact from the cut would not be too significant.

“We believe that the banks’ earnings sensitivity to a 25-bps rate cut is manageable, with sector profit after tax and minority interests affected by about minus 1% to minus 2% on a full-year basis,” it said.

The research house’s top bank stock picks remained Malayan Banking Bhd (target price or TP of RM10.90), Hong Leong Bank Bhd (TP of RM24.30) and CIMB Group Holdings Bhd (TP of RM8.40).

“We maintain our forecasts pending the second quarter ended June 30 (2Q) reporting season, and as the impact of the OPR cut should be broadly cushioned by the SRR reduction,” it said.

Hong Leong Investment Bank Research, which has an unchanged “overweight” call on banks, said the anticipation of an OPR cut had led banks to adopt a cushioning strategy by reducing promotional and conventional fixed deposit rates by five to 20 bps since April, as typically an OPR cut would put pressure on their net interest margins (NIMs).

It has recommended a strategy of leaning into cyclical bank stocks during sell-offs to position for the rebound, with CIMB (TP of RM8.80) and AMMB Holdings Bhd (TP of RM6.20) serving as the primary high-beta (that is, more volatile) vehicles to capture the upswing and RHB Bank (TP of RM7.70) offering a balancing, high-quality exposure with defensible growth prospect.

“We also have ‘buy’ calls on Affin Bank Bhd (TP of RM3), Alliance Bank Malaysia Bhd (TP of RM5), Public Bank Bhd (TP of RM5.10). Key risk to our ‘overweight’ call includes a sharper-than expected economic slowdown, prolonged deposit pricing pressure and escalation in global trade tensions,” it said.

Kenanga Research, which has an unchanged “overweight” call, said earnings in 3Q could decrease by 1% to 4% purely from lower adjusted NIMs.

Its top pick for 3Q, AMMB (TP of RM6.90), has more solid return-on-equity backbone as the bank focuses on stronger earnings drivers as opposed to gaining market share in less profitable segments.