Equity Analysis /
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FM and EM Banks: Where the rate-cut cycle hits hardest

  • For our coverage, median interest rates are expected to fall by a further 60bps this year, bringing FY total to c100bps

  • A 100bps cut in interest rates structurally lowers bank margins by a median 18bps and sector profits by 7%

  • Biggest hit to margins: Argentina, Egypt and Saudi Arabia. Largest profit falls: Argentina, Saudi Arabia

Rahul Shah
Rahul Shah

Head of Corporate & Thematic Research

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Rohit Kumar
Rohit Kumar

Global Financials/Thematics

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Tellimer Research
17 March 2020
Published byTellimer Research

Following Egypt’s 300bps rate cut yesterday and Pakistan’s 75bps cut today signalling the beginning of its rate cut cycle, we update our Aug-19 report (Falling interest rates – friend or foe?) for FY 19 bank disclosures and current interest rate move forecasts. Relative to the leading developed market economies, most EM central banks have more scope to loosen monetary policy to help cushion their economies in the face of a Covid-19 slowdown.

For our coverage universe, a 100bps cut in interest rates structurally lowers bank margins by a median 18bps, although the effect can take time to manifest itself. The median hit to profits from such a margin squeeze is 7%. Bank margins and profits in Rwanda, GCC and Kenya are most responsive to interest rate changes (excluding secondary effects on volume and asset quality). In contrast, banks in Vietnam and Nigeria should prove more resilient in terms of both margins and profits.

Across our coverage, median interest rates are expected to fall by a further 60bps this year, bringing the full year total to c100bps, which knocks 7% off sector profits via lower margins. Moreover, the economic slowdown that will result from anti-Covid-19 measures will make it more difficult for banks to offset this margin squeeze through increased lending activity.

Based on current interest rate forecasts, banks in Argentina, Egypt and Saudi Arabia are expected to be hardest hit in terms of lower margins, and those in Argentina, Saudi Arabia and Qatar in terms of lower profits. In contrast, banks in Bangladesh could see less impact in terms of both margins and profits. 

Margin impact of 100bps rate cut – structural mismatch 

Source: Tellimer Research

Note that our report focuses on structural mismatches, but this will likely overstate the margin impact due to mitigating bank actions. Our Aug-19 report also considered near-term mismatches, which likely more accurately reflects the one-year margin impact of any rate cuts.