Malaysian banks’ profits showed little to no growth due to lower loan growths and compressed margins in the second quarter of 2019. Analysts have cited Bank Negara, the central bank of Malaysia’s decision to cut down the overnight policy rate (OPR) in May as the main reason behind the decrease in Malaysian banks’ profits. The cumulative core earnings of the banks listed in Bursa Malaysia, the stock exchange of Malaysia, with the exception of MBSB Bank, was RM6.3 billion.

A banking analyst told the regional media that the biggest concern in the upcoming reporting season is to what extent the rate cut impacted the banks’ net interest margins (NIM). Quarter-on-quarter net interest margin is expected to fall. The banks’ second quarter core earnings without considering one-off elements is expected to remain flat compared to the first quarter of 2019 and the second quarter of 2018.

Bank Negara lowered the overnight policy rate by 25 basis points to 3 percent, on May 7. The rate had not been reduced since July 2016. The rate cut led to an immediate downward re-pricing of the Malaysian banks’ floating rate loans and a lag in the re-pricing of fixed rate deposits.

Alliance Bank Malaysia and BIMB Holdings were the most affected by the rate cut as they have the highest proportions of floating rate loans.

Analysts expect a slowdown in loan growth and deterioration in asset quality in the second quarter banking results. The loan growth decreased from 4.5 percent in May to 4.2 percent in June 2019 while the gross impaired loan (GIL) rose from 1.53 percent in May to 1.57 percent in June 2019.

The capital markets are still weak, making it unlikely for the banks to count on non-interest income to counter the falling revenue. According to estimates from the analysts, the Malaysia banks’ profit and revenues are expected to fall further in the second quarter of the year.