This article first appeared in The Edge Malaysia Weekly on July 14, 2025 - July 20, 2025

A recent cut in the overnight policy rate (OPR) of 25 basis points is expected to weigh on banks’ net interest margins (NIMs) but there are mitigating factors that could help ease the impact on earnings, analysts say.

These include the reduction in the statutory reserve requirement (SRR) for lenders by 100bps to 1% that took effect May 16, which released some RM19 billion into the banking system, and lower rates in the interbank money market since late last year, which indicate a relative easing of funding cost pressure.

Banks are also likely to get a non-interest income boost from relatively lower bond yields, which could help cushion the negative impact on margins.

“It’s not as bad as it looks. If one takes the view that there will be no more rate cuts, at least for this year, these mitigating factors will help protect banks’ NIMs to some extent,” a senior banking analyst tells The Edge.

As at July 11, all 10 of the country’s listed banking groups had announced a 25bps reduction in their lending reference rates and deposit rates following Bank Negara Malaysia’s move to cut its OPR by the same quantum on July 9. However, the new rates come into effect on different dates, ranging from as early as July 10 by Bank Islam Malaysia Bhd (KL:BIMB) to as late as July 17 by MBSB Bank Bhd (KL:MBSB).

For now, most of the banks’ economics teams expect no further cuts to the OPR for the rest of the year.

Maybank Investment Bank Research notes that the liquidity position within the banking system appears to be much improved, going by the three-month Kuala Lumpur Interbank Offered Rate (Klibor), which had eased to 3.47% (as at July 9) from a recent peak of close to 3.75% in 4Q2024.

“This would suggest that deposit competition within the banking system is less intense today than it was in 4Q2024, which is positive for overall NIMs,” the research house observes in a July 10 report. The three-month Klibor had eased further to 3.23% as at July 11.

Meanwhile, the 10-year Malaysian Government Securities yield had declined by about 37bps to 3.44% (as at July 11) from 3.81% in December 2024. “This could potentially contribute to marked-to-market gains on banks’ FVTPL (fair value through profit or loss) investments, which could partially compensate for the compression in margins,” Maybank IB Research states.

One of the main reasons NIMs were depressed in the last two years was because of the industry’s intense competition for deposits.

“We had already anticipated, and factored in, the impact of one rate cut in 2H2025. Consequently, we recently trimmed our NIMs by 2bps to 3bps on average, across the board. We now expect an average NIM compression of 2bps to an average of 2.06% in 2025 [from 2.08% in 2024] and flat NIMs in 2026,” Maybank IB Research says.

RHB Research analysts too believe the OPR cut will not have a material impact on banks, citing the recent SRR cut and the potential for banks to realise trading profits as mitigating factors.

“We believe that the banks’ earnings sensitivity to a 25bps rate cut is manageable, with sector Patmi (profit after tax and minority interest) affected by about -1% to -2% on a full-year basis,” they say in a July 10 report. “Broadly, we find that the earnings of smaller banks are more sensitive to rates versus the big banks — due to a less diversified income mix (which means a greater reliance on net interest income) and higher operating leverage.”

In theory, Bank Islam and Alliance Bank Malaysia Bhd (KL:ABMB) are likely to be the most vulnerable to the interest rate cut, given that they have among the highest proportion of floating-rate loans among lenders, at 84% and 86% respectively, as at end-March.

Nevertheless, Bank Islam and Alliance Bank both also have relatively high levels of current-account-savings-account (CASA), which could help cushion some of the negative impact, some analysts note.

“In the case of Alliance Bank, which is raising [RM606.49 million of] funds from a rights issue, it’s quite clear that if it utilises the funds well, then that should help protect its margin too,” the earlier analyst says. The rights shares will be listed on July 15.

Nomura Research estimates that the NIMs of banks under its coverage are likely to decline by 2bps to 3bps for the full year, assuming a six- to nine-month lag between the repricing of loans and deposits.

It expects the impact to be towards the high end of the range — around 3bps annualised NIM impact — for domestic-focused banks such as Public Bank Bhd (KL:PBBANK), Alliance Bank and AMMB Holdings Bhd (KL:AMBANK) and lower (1bp to 2bps) for the Asean-focused Malayan Banking Bhd (KL:MAYBANK), CIMB Group Holdings Bhd (KL:CIMB) and RHB Bank Bhd (KL:RHBBANK). The latter group of banks is less impacted, given that the OPR cut affects only Malaysia-based consumer loans.

“On a full-year basis, we estimate the earnings impact to be about 2% for Public Bank, Alliance Bank and AMMB, and about 1% for Maybank, CIMB and RHB Bank,” its analyst says in a recent report.

Meanwhile, it remains to be seen if the lower interest rate environment helps boost loan growth, considering that lingering uncertainties on tariff rates and geopolitical conflict seem to have affected consumer sentiment. Consumer loan growth in the banking system had moderated to 5.8% in May compared with 6.6% a year earlier.

Nevertheless, lower interest rates should improve borrowers’ cash flow, enabling better debt servicing and potentially reducing asset quality risks. “In the recent 1Q2025 results, some banks reported a rise in mortgage impairments linked to cost-of-living pressures, as well as signs of stress in unsecured loans,” TA Securities notes.

A quick check of seven investment research houses shows that three have an “overweight” call on the sector while four have a “neutral”. “We do expect better total returns from the sector in 3Q2025, chiefly due to dividends. Beyond that, however, the sector lacks fresh catalysts, so further upside could be capped,” RHB Research, which has a “neutral” stance, says. Its top picks are Maybank, Hong Leong Bank Bhd (KL:HLBANK) and CIMB.

Kenanga Research has an “overweight” stance, which it says is underpinned by the sector’s attractive valuation at 1.04 times forward price-to-book value, robust 5.4% dividend yield offering downside support, and earnings resilience backed by substantial pre-emptive provisions that the lenders have made. Its top picks are CIMB, AMMB and RHB Bank.

“Key risk to our overweight call includes sharper-than-expected economic slowdown, prolonged deposit pricing pressure and escalation in global trade tension,” it says.

As at July 11, the Bursa Malaysia Financial Services Index had shed 8.15% year to date compared with the stock market bellwether FBM KLCI’s 6.47% decline. 

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