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Malaysian Reserve
a day ago
- Business
- Malaysian Reserve
BNM lowers OPR amid trade, demand risks
Move seen as early buffer, not start of easing cycle — analysts split on further cuts by RUPINDER SINGH IN A move that had been anticipated by a narrow majority of analysts, but still marked a significant shift in tone, Bank Negara Malaysia (BNM) reduced the Overnight Policy Rate (OPR) by 25 basis points (bps) to 2.75% on July 9. This is the central bank's first rate cut since July 2020, and comes amid growing external uncertainties, including the looming implementation of US tariffs and fragile global demand conditions. The decision signals a clear shift toward a more accommodative monetary stance, driven by the need to preemptively support growth while keeping inflationary pressures in check. In its Monetary Policy Statement (MPS), BNM said the rate cut was a 'preemptive step to safeguard the domestic growth trajectory amid contained inflationary pressures'. The Statutory Reserve Requirement (SRR) was left unchanged at 1%, following a 100bps reduction in May that injected about RM19 billion into the banking system. BNM now emphasises the SRR as a liquidity tool, not a signalling mechanism. Since the SRR cut, the 3-month Kuala Lumpur Interbank Offered Rate (KLIBOR) has eased from 3.7% to 3.5%, signalling improved interbank funding conditions. Why the Cut Now? The move comes against a backdrop of increasing downside risks to Malaysia's growth. The Ministry of Investment, Trade and Industry (MITI) is currently in negotiations with US officials to forestall a 25% tariff imposition on Malaysian exports — a deadline now extended to Aug 1. BNM's MPS flagged that the balance of risks remains tilted to the downside, particularly due to 'slower global trade, weaker sentiment, and lower-than-expected commodity production.' Public Investment Bank Bhd (PublicInvest Research) noted that while the July MPS retained a cautious tone, the language was 'toned down slightly' from earlier statements, replacing more alarming references to a 'deeper economic slowdown' with a cleaner framing of persistent, but not catastrophic, risks. UOB Global Economics added that although domestic growth has been relatively resilient, 'the eventual tariff landing remains fluid, reflecting ongoing uncertainties in the negotiation process'. This introduces a great deal of ambiguity in Malaysia's export outlook, particularly for sectors such as electrical and electronics (E&E) and semiconductors. At the same time, external trade data has started to show signs of deceleration. Exports are expected to grow by just 3.5% this year, down from 5.7% in 2024. A combination of slowing global demand and anticipated restrictions on artificial intelligence (AI) chip shipments to Malaysia and Thailand by the US could further weigh on sentiment and performance in key export industries. On the domestic front, although labour markets have held up and household consumption remains stable, growth momentum has become increasingly reliant on domestic investments and policy-driven spending. According to PublicInvest Research, 'Growth is expected to be supported by resilient domestic demand, with employment and wage growth, particularly within domestic-oriented sectors, alongside income-related policy measures, continuing to support household spending.' BNM appears to be using the current window — before the global slowdown becomes more entrenched or policy uncertainty in the US crystallises into real economic fallout — to build buffers. As UOB noted, 'Taken together, we think incoming data (particularly GDP and external trade), developments of global tariff policy and geopolitical events are key determinants for the future rate path.' This backdrop has opened up space for BNM to make a measured cut without triggering volatility in capital flows or compromising financial stability. The central bank still maintains a positive real-interest rate environment, suggesting that it retains further room to ease if needed, without falling behind the curve on inflation or currency risk. Implications for the Banking Sector According to Hong Leong Investment Bank (HLIB Research), the OPR cut will exert near-term pressure on banks' net interest margins (NIMs), given that loan repricing tends to occur faster than deposit repricing. Banks with a higher proportion of floating-rate loans such as Affin Bank Group Bhd and Bank Islam Malaysia Bhd (BIMB) are expected to be more adversely affected. Conversely, AMMB Holdings Bhd and CIMB Group Holdings Bhd, with more balanced deposit structures and loan books, are likely to weather the rate cut with minimal disruption to margins. HLIB Research estimates that the 25bps cut will result in a sector-wide NIM compression of 3bps-4bps and a corresponding 2%-3% decline in profit forecasts, barring any mitigating factors. However, banks had already begun adjusting fixed-deposit rates downwards by 5bps-20bps since April, effectively preempting part of the OPR move. This proactive stance may soften the immediate earnings impact. Moreover, HLIB Research sees three mitigating factors cushioning the sector from a more significant drag: (i) The recent SRR cut has injected approximately RM19 billion in fresh liquidity into the system, giving banks more room to manage funding cost pressures. (ii) The easing of deposit competition is expected to lower funding costs further. As promotional fixed-deposit rates normalise, banks will likely benefit from a more stable deposit base. (iii) The banking sector has pivoted to a more disciplined approach in loan expansion and funding strategies, improving asset-liability matching and capital efficiency. Importantly, the sector's resilience is underpinned by healthy capital buffers and ample preventive provisioning. With common equity tier 1 (CET1) ratios for major banks well above regulatory minimums, and loan loss coverage remaining elevated, the system is adequately cushioned against near-term earnings volatility. Historical patterns also suggest that NIM compression after an OPR cut tends to be short-lived. Following the last rate cut in July 2020, sector NIMs actually expanded in the quarters that followed, due to the lagged repricing of deposits and improved bond portfolio valuations amid falling yields. Public Bank and Malayan Banking Bhd (Maybank), which traditionally maintain a conservative asset profile, may experience less earnings volatility compared to high-beta plays like CIMB Bank or RHB Bank Bhd. That said, CIMB Bank and AMMB are viewed as attractive rebound proxies due to their higher operating leverage and more cyclical loan books. Looking ahead, HLIB Research maintains its 'Overweight' stance on the banking sector. 'We view the OPR cut in early second half of 2025 (2H25) as a positive development, as it helps to remove one of the key share price overhangs,' it said. CIMB, AMMB and RHB Bank are its top picks, offering a mix of cyclical upside and defensible balance sheets. The broader sector is also supported by a 5.4% average dividend yield, which offers a valuation cushion in a volatile market. Nonetheless, risks remain. A sharper-than-expected economic slowdown, prolonged deposit pricing pressure, or an escalation in global trade tensions could temper the sector's resilience. Investors will be closely monitoring the upcoming earnings season to assess how individual banks are managing margin pressure and loan growth in the new rate environment. What's Next for Policy? Economists remain divided on whether BNM's latest move marks the beginning of a broader easing cycle, or a one-off recalibration to address rising uncertainties. While the July policy decision reaffirms BNM's readiness to act preemptively, the central bank also signalled that future decisions will be data-dependent rather than part of a pre-set path. PublicInvest Research expects the current 2.75% OPR level to be maintained through year-end. 'We assess BNM's policy bias as conditionally accommodative, with any further adjustment contingent on a marked deterioration in global conditions or more pronounced domestic weakness,' it said. 'With real policy rates still in positive territory and inflation expectations well anchored, the move appears intended to provide an early buffer rather than mark the start of a full easing cycle.' UOB, however, continues to forecast one additional cut. 'The current risk assessment and economic landscape still support our view for an additional 25bps cut in the OPR to 2.50% by end-fourth quarter of 2025 (4Q25),' it noted. Two more Monetary Policy Committee (MPC) meetings remain, scheduled to run over two-days, starting on Sept 3 and Nov 5. Analysts say the 2Q GDP release on July 18, the government's updated growth forecast later this month, and the tabling of the 13th Malaysia Plan (13MP) on July 28 will be key inputs into BNM's next decisions. Developments in US trade negotiations and potential tariff actions will also be closely watched. BNM has noted that there is still policy space should the need arise. Analysts interpret this as room for a further rate cut if growth falters or global volatility intensifies. Until then, BNM is expected to remain in wait-and-see mode, guided by data and external developments. Market watchers will also be parsing BNM's upcoming quarterly Economic and Financial Developments report for deeper insight into the central bank's internal projections. Till then, investors can expect BNM to stay in a data-driven wait-and-see mode, with monetary tools calibrated to balance resilience and responsiveness. Markets, Growth and Broader Outlook Malaysia's economic growth trajectory remains intact, though downside risks have become more pronounced. PublicInvest Research maintains its 2025 GDP forecast at 4.2%, down from 5.1% in 2024, reflecting a moderation driven largely by external headwinds. UOB, meanwhile, anticipated 2Q GDP to ease to 3.8% year-on-year (YoY) from 4.4% in the 1Q, citing a slowdown in exports and manufacturing output. Despite these external drags, domestic fundamentals remain resilient. Employment levels continue to improve, with the unemployment rate forecast to dip further to 3.2% this year. Wage growth, particularly in the domestic-oriented sectors, is expected to support private consumption alongside targeted government fiscal measures. 'Growth is expected to be supported by resilient domestic demand, with employment and wage growth continuing to support household spending,' noted PublicInvest Research. On the investment front, both private and public sector activity is underpinned by multi-year project pipelines and rising realisation rates of previously approved investments. Infrastructure rollouts under the 12MP and catalytic projects tied to the upcoming 13MP are also likely to lend support to construction and services segments in the 2H. That said, much hinges on policy clarity and investor confidence. The tabling of the 13MP in Parliament on July 28 is expected to offer a strategic roadmap for medium-term development, fiscal consolidation and industrial trans- formation. Investors will be scrutinising the plan for details on infrastructure priorities, digital economy integration and green transition funding mechanisms. Externally, the picture remains clouded by geopolitical tensions, volatile commodity markets and uncertainty over US trade policy. The 90-day pause on reciprocal tariffs by the US, which expired on July 9, has been extended to Aug 1. According to PublicInvest Research, a letter from the White House dated July 7 reaffirmed the deadline, though the door remains open for further negotiations. BNM has acknowledged these uncertainties but continues to believe that structural reforms and ongoing fiscal consolidation efforts will anchor market confidence. Meanwhile, Malaysia's broad money supply (M3) rose 2.7% YoY in May, indicating adequate liquidity in the system. Core inflation eased to 1.8% YoY in May, down from 2% in April, supporting BNM's view that inflationary pressures remain contained. Despite subsidy rationalisation and Sales and Service Tax (SST) expansion, second-round effects remain limited. In capital markets, the FTSE Bursa Malaysia KLCI has remained range-bound in recent weeks, reflecting a wait-and-see stance by investors. The financial sector, buoyed by attractive valuations and strong dividend yields, remains a key pillar of support, while defensive sectors like utilities and healthcare have outperformed amid broader risk aversion. Currency-wise, the ringgit's year-to-date (YTD) appreciation of over 5% against the US dollar reflects improving investor sentiment, bolstered by a narrowing policy rate differential with the US Federal Reserve and positive trade balances. Analysts expect the ringgit to trade within the 4.10-4.25 range through year-end, barring major external shocks. Looking forward, Malaysia's economic narrative for the rest of 2025 will be defined by its ability to sustain domestic demand, maintain policy credibility, and navigate external risks. 'We expect domestic activity to remain supported by ongoing reforms and investment execution,' said UOB. 'However, the external environment will remain fluid, and Malaysia's exposure to global trade and capital flows means the outlook could shift quickly.' In sum, while the OPR cut sends a clear message of growth support, it also sets the stage for a careful recalibration of macro policy amid persistent volatility. The weeks ahead, marked by economic data releases, policy announcements, and international developments, will be pivotal in shaping market sentiment and policy trajectories. This article first appeared in The Malaysian Reserve weekly print edition
New Straits Times
04-07-2025
- Business
- New Straits Times
Bank Negara may need to do more as liquidity strains persist
KUALA LUMPUR: A month after Bank Negara Malaysia reduced the amount of reserves that banks must set aside, early signs show the move has helped ease liquidity pressures in the financial system, but analysts say it may not be enough. The 100 basis-point reduction in the Statutory Reserve Requirement (SRR) on May 16 injected RM19 billion into the banking system. CIMB Securities said the additional cash helped bring down short-term borrowing costs, but deeper funding stress remains. "These actions had a measurable impact in easing funding conditions, as seen in the reduction in interbank rates," CIMB Securities senior economist Azri Azhar and head of research Michelle Chia said in a note. They were referring to the Kuala Lumpur Interbank Offered Rate (KLIBOR), the interest rate banks charge each other for short-term loans. A commonly watched measure, the spread between the three-month KLIBOR and the Overnight Policy Rate (OPR), has narrowed from 65 basis points (bps) to 49 bps since the SRR cut. However, that spread is still wider than the pre-pandemic norm of 35-45 bps, suggesting that borrowing costs in the system remain higher than ideal. In short, banks still face some difficulty accessing affordable short-term funds, which can limit their ability to lend. Credit growing faster than deposits One of the key reasons is that loan growth continues to outpace deposit growth. For the past 16 consecutive months, banks have been lending more than they have been able to collect from depositors. CIMB Securities said this has pushed the loan-to-deposit ratio to 87.9 per cent, close to its upper comfort limit. "Liquidity has improved, but it has not recovered to the more comfortable levels above RM60 billion, which support a more constructive loan-deposit ratio," the firm said. It added that the situation is further compounded by how Malaysians, both consumers and businesses, are choosing to hold their money. In May, fixed deposits, traditionally a stable source of bank funding, shrank by 1.2 per cent year-on-year. At the same time, foreign currency deposits surged by 16.7 per cent, as more Malaysians shifted their savings into US dollars or other currencies in search of better returns or to hedge against ringgit volatility. This trend reduces the availability of ringgit funding in the local banking system, making banks more reliant on short-term interbank markets to meet demand. External risks and policy room CIMB Securities said these funding pressures are occurring against a backdrop of uncertain global conditions, including the potential economic fallout from US President Donald Trump's tariff regime. It noted that Malaysia's economy grew 4.4 per cent in the first quarter of 2025, the slowest pace in a year, partly due to a front-loaded export push ahead of the anticipated tariff changes. More concerning, the firm said, is that money supply growth continues to lag behind nominal gross domestic product, signalling that monetary conditions remain tighter than ideal for an economy facing mounting external risks. With the SRR now at one per cent and the OPR unchanged, CIMB Securities said there is still policy space for further action, either by cutting interest rates or by making more liquidity available through additional SRR tweaks. It noted that funding pressures typically intensify toward year-end, with the KLIBOR–OPR spread widening sharply in December, reaching as high as 93 bps in 2022, 77 bps in 2023, and 73 bps in 2024. A preemptive move now, the firm added, could help Bank Negara avoid another seasonal crunch and keep credit flowing smoothly through the second half of 2025.
New Straits Times
21-05-2025
- Business
- New Straits Times
Aeon boosts edge with strong property management, mall upgrades
KUALA LUMPUR: Aeon Co (M) Bhd's property management segment (PMS) is expected to continue its momentum with a healthy occupancy rate, coupled with better rental renewals. Hong Leong Investment Bank Bhd (HLIB Research) said renovation works have commenced at several Aeon stores and malls, reinforcing the group's continued commitment to strengthen its competitiveness and relevance in an increasingly dynamic retail landscape. It added that these will also include better tenant management through effective tenancy renewals and tenant mix optimisation to ensure continued success of the PMS business. "We recall the two refurbished malls (Aeon Ayer Keroh and Aeon Cheras Selatan) generated a 20 per cent year-on-year (YoY) revenue increase after the renovation. "PMS earnings before interest and taxes (EBIT) grew commendably by 28 per cent YoY. We note PMS formed the bulk of operating profit, averaging about 78 per cent in the past three years. "On the retail front, Aeon is broadening its product offerings with a focus on private labels, positioning itself to tap into the shifting consumer trends," it said in a note today. HLIB Research has maintained a "Buy" call on Aeon with a target price of RM1.82. The firm are confident with Aeon's sales trajectory and reckon that the group's strategy would enable them to further benefit from recent government initiatives such as the Employees Provident Fund (EPF) Account 3, civil servants pay hike and minimum wage increase. Meanwhile, RHB Investment Bank Bhd (RHB Research) expects near-term sales softness due to seasonal factors, with festive spending largely frontloaded into the first quarter (Q1). "Looking beyond the immediate term, Aeon is well-positioned to execute its expansion plans (KL MidTown and AEON Seremban 2) supported by healthy gearing (8.7 per cent) and a lower Kuala Lumpur Interbank Offered Rate (KLIBOR) environment amid global rate cuts. "Its organic growth outlook remains intact, underpinned by strong occupancy and high single-digit rental reversions, driven by ongoing refurbishment efforts that continue to attract popular tenants," it added. Furthermore, RHB Research said Aeon's retail segment should benefit from resilient consumer spending, supported by rising wages and increased cash assistance to lower-income households. The firm noted that Aeon is also expanding its private brand portfolio (currently accounting for 17 per cent of sales), offering margin uplift and improving customer retention through exclusive offerings. RHB Research has maintained a "Buy" call on Aeon with a target price of RM1.75, citing solid growth prospects in its property management segment, supported by an active expansion strategy and ongoing asset enhancement initiatives. It added that the retail segment should remain supported by resilient consumer spending and margin expansion from cost-control efforts. Both HLIB Research and RHB Research noted that Aeon's first quarter ended March 31, 2025 (Q1 2025) results were in line with expectations. Similarly, CIMB Securities Sdn Bhd views Aeon's results as in line with expectations, noting that earnings are likely to soften over the next two quarters (Q2 2025 and Q3 2025). This is owing to the absence of festivities during the period and lower mall footfall due to ongoing renovation works, which we expect to be completed by the end of Q3 2025. "We expect earnings to be weaker QoQ in Q2 2025 and Q3 2025, as the strongest quarters for Aeon are typically Q1 and Q4 owing to festive-driven spending. "Still, we anticipate FY25 earnings to grow by 5.8 per cent YoY, underpinned by mall rejuvenation efforts in FY24 (reopening of five stores/malls between Aug and Nov 2024). "This includes sustained high occupancy rates in the property management segment, supported by an annual rental reversion of 7.4 per cent in FY25," it added. With the Q1 2025 results meeting its expectations, CIMB Securities has maintained a "Buy" call on Aeon with a target price of RM1.75.
New Straits Times
09-05-2025
- Business
- New Straits Times
Markets surprised by Bank Negara's RM19bil liquidity injection
KUALA LUMPUR: The statutory reserve requirement (SRR) reduction is a "quasi-easing" measure that caught markets off guard. But the move by Bank Negara Malaysia on Thursday may preserve the country's financial market competitiveness amid a wave of regional monetary easing, said Hong Leong Investment Bank Bhd (HLIB). HLIB said the move came as a surprise given seemingly comfortable liquidity position of the banking sector. It pointed out that the sector's liquidity coverage ratio stood at a healthy 152 per cent as of March 2025, while the loan-to-deposit ratio remains comfortable at 87.6 per cent, still below its five-year peak of 89.7 per cent. Deposits are growing steadily at 3.0 per cent year-on-year, while credit demand remains strong and fixed deposit competition is relatively muted. HLIB said the gradual decline in the three-month Kuala Lumpur Interbank Offered Rate (KLIBOR) since early this year from 3.73 per cent to 3.63 per cent further supports the view of sufficient interbank liquidity. "We believe this move, while seemingly accommodative, is primarily aimed at preserving Malaysia's financial market competitiveness amid regional easing trends. "Rather than indicating economic unease necessitating a monetary policy adjustment, it likely reflects a proactive stance against potential external risks," the firm said. Bank Negara unexpectedly slashed the SRR ratio by 100 basis points to one per cent yesterday, marking the first such move since March 2020. The cut is expected to inject about RM19 billion in additional liquidity into the banking system. By utilising an SRR cut instead of an OPR reduction, HLIB said the central bank strategically avoids direct pressure on the ringgit and the associated risk of imported inflation. Based on its calculations,the firm said the additional liquidity could boost bank net profits by one to three per cecnt, providing a buffer against a potential rate cut. "Our house view remains that a 25 basis points OPR cut is likely in the second half of 2025," it added. HLIB maintained its "overweight" stance on the banking sector, citing a favourable risk-reward profile with sector valuations at 1.09 times price-to-book value (P/BV), a 0.5 standard deviation below the 10-year average. The firm also said the sector has an attractive average dividend yield of 5.1 per cent and resilient earnings capacity backed by substantial pre-emptive provisioning buffers. MIDF Research said the reduction of the SRR, the lowest level in 14 years, is a proactive measure to ensure sufficient liquidity amid heightened concerns of the effects of trade war and risks of global slowdown. "This may encourage banks to extend more credits to the economy and support further expansion in the domestic economic activities. "For the record, banking loan growth moderated to 5.2 per cent year-on-year in March 2025, slower than 5.5 per cent in December 2024 and average 5.9 per cent rise in 2024," it said. UOB Global Economics & Markets Research said the move will help support continued lending activities to ensure stable economic activity. Following the dovishness in the latest monetary policy statement and the SRR cut, the firm expects two 25 basis points OPR cuts, one each in the third and fourth quarter of 2025, from status quo previously. "This will take the OPR to 2.5 per cent by end-2025. The Monetary Policy Committee (MPC) will next meet on July 8-9, which coincides with the end of the 90-day reciprocal tariff pause that could bring the tariff rate for Malaysia back up to 24 per cent from the current baseline 10 per cent tariff imposed," it said.
