Lifetime Membership What a rampage! Like a crazy bull on the rampant, OCBC share price turbocharged to record highs following US Fed’s jumbo interest rate cut of 50 basis points. Year-to-date, OCBC share price surged 20% to hit a record of $15.60. Of noteworthy is that all the three bank stocks went on a rally after the Fed interest rate cut. Why is that so? After all, wouldn’t the interest rate cut hit the banks’ Net Interest Margin (NIM) and Net Interest Income (NII)?
Whilst a lower interest rate will surely eat into earning margins for the banks, it will also spur demand for loans. This is especially so for housing loans, which had been hit left, right and center by the longer-than-expected high interest rate climate. All three banks have significant exposure to the local housing loan market. Hence, a lower interest rate could actually benefit the banks if the cut is not so drastic.
Additionally, lower interest rate also helps to improve a bank’s asset quality as borrowers repay their loans, resulting in lower bad debts. An interesting to note is that the Non-Performing Assets (NPA) of OCBC has been trending down since FY2021 – from $4.338 billion in FY2021 to $2.9 billion in 1HFY2024.
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