BNM Lowers OPR By 25bps; NEUTRAL

  • NEUTRAL, Top Picks: Malayan Banking, Hong Leong Bank and CIMB. Yesterday, Bank Negara Malaysia (BNM) lowered the overnight policy rate (OPR) by 25bps to 2.75% (vs RHB Economics’ expectation of an unchanged OPR in 2025). This decision is not expected to impact the banks materially, as the statutory reserve requirement (SRR) was pared down to 1% (from 2%) in May, and there is potential for banks to realise trading profits. While RHB Economics sees BNM holding the OPR steady into 2026, we do not see the cut as the start of an easing cycle – given the lack of fresh catalysts.
  • BNM cuts OPR to 2.75%. The Monetary Policy Committee has cut the OPR to 2.75% from 3.0% as a pre-emptive move, as it sees the balance of risks to growth tilted towards the downside from slower global trade, weaker sentiment and lower-than-expected commodity production. RHB Economics expects BNM’s future OPR decisions to be data-dependent, but thinks the OPR could remain at 2.75% for the rest of the year – provided GDP growth is within the range of 4-5%. The central bank plans to release its revised GDP forecast for 2025 by end-July, and its governor Dato’ Seri Abdul Rasheed Ghaffour has stated that he does not expect a major revision to the figures.
  • Impact from 25bps cut per se is not too significant … We believe that the banks’ earnings sensitivity to a 25bps rate cut is manageable (Figure 1), with sector PATMI affected by about 1% to -2% on a full-year basis. By our calculations, BIMB’s earnings are most sensitive to policy rate changes, due to a high proportion of floating-rate loans and a relatively large CASA mix. Broadly, we find that the earnings of smaller banks are more sensitive to rates, vs the big banks – due to a less diversified income mix (greater reliance on NII) and higher operating leverage.
  • … further mitigated by SRR cut and trading profits. In mitigation, BNM’s move to release additional liquidity into the system via May’s reduction in the SRR to 1% from 2% should help to offset the bulk of the impact from the OPR cut. By our estimates, sector PATMI could rise by c.1.3% from the 1ppt decline in SRR (assuming 3-month KLIBOR returns). Meanwhile, some banks had mentioned earlier that their fixed income books were sitting on healthy unrealised profits on the back of favourable bond yield movements. We think banks could take the opportunity to realise some of these profits to further help cushion the impact of the OPR cut.
  • We maintain our forecasts pending the 2Q25 reporting season, and as the impact of the OPR cut should be broadly cushioned by the SRR reduction. In our view, the sector’s lacklustre performance in recent months was due to: i) Concerns and uncertainties over the impact of the US tariff policy, which fuelled expectations that BNM would need to cut the OPR to support growth, ii) a soft 1Q25 reporting quarter, and iii) decelerating loan growth. Yesterday’s OPR move could help clear part of the overhang. We do expect better total returns from the sector in 3Q25, chiefly due to dividends. Beyond that, however, the sector lacks fresh catalysts so further upside could be capped.