Malaysia's top banks expect another rate cut, squeezing margins slightly

KUALA LUMPUR (Reuters) - Malaysia’s top two lenders both said on Thursday that they expect a quarter point cut in interest rates before the end of this year, putting slight pressure on their margins.

Malayan Banking Bhd (Maybank) MBBM.KL and CIMB Group Holdings Bhd CIMB.KL have already seen their net interest margins (NIM) - a key gauge of bank profitability - squeezed this year as the Malaysian central bank cut interest rates in May for the first time since July 2016.

“For every 25 basis points (rate cut), the impact on our NIM is around 1 basis point,” Maybank Group President and CEO Abdul Farid Alias told an earnings briefing.

In the first half of the year, Maybank said its NIM shrunk by 9 basis points to 2.24% due to a number of factors including a drop in Malaysian yields following the central bank’s quarter point rate cut in May and higher deposit costs in overseas markets.

CIMB said its NIM fell 7 basis points to 2.46% in the first half and a further rate cut could push it down by another 1-2 basis points in the second half. The bank forecast its NIM could fall by up to 10 basis points for this year.

Going forward, Maybank, Malaysia’s largest lender by assets, lowered its return on equity guidance to 10-10.5% from 11%, citing revised expectations for a subdued growth environment.

The bank flagged global uncertainties, having earlier been optimistic of a resolution of the U.S.-China trade war.

“We expected the market to bounce back and people will start investing and spending...but that was not what happened so we had to relook at our strategy,” Farid said.

Both banks reported a drop in second-quarter net profits on Thursday.

CIMB, however, said group loan growth, targeted at 6% for the year, was on track.

“If we continue to have the same run rate as we had in the first six months, we should be able to meet the targets,” group CEO Zafrul Aziz told reporters.

Maybank reported a 1% fall in net profit for April-June from a year earlier to 1.94 billion ringgit ($463 million).

Revenue, however, rose 13.4% to 13.05 billion ringgit.

CIMB reported a second-quarter net profit of 1.51 billion ringgit, down from a record high quarterly profit a year ago of 1.98 billion ringgit when it was helped by one-off gains from stake sales in joint ventures.

Its second-quarter revenue this year fell by 8% to 4.47 billion ringgit.

Reporting by Liz Lee; Editing by Susan Fenton