Investment Highlights

• BNM announced another 25bps reduction of the Overnight Policy Rate (OPR) to 2.75% from 3.00% which came in earlier than expected even though we have anticipated a rate cut in 1H20. This follows the OPR cut of 25bps in May 2019 to 3.00% and the lowering of SRR by 50bps to 3.00% in Nov 2019.

• OPR cut a pre-emptive move by Central Bank to secure the improving growth trajectory of the economy. BNM highlighted that GDP growth for 2019 will be within its projected range while for 2020, growth will gradually improve supported by consumption spending and improvement in exports. Nevertheless, it cautions that downside risk remains from geopolitical tensions and policy uncertainties of certain countries.

• Our base case GDP growth for 2020 is unchanged at 4.6%. Our economist expects BNM to stand pat on interest rate for the rest of 2020 with room for another cut should the domestic economic growth turns out to be much weaker.

• Minimal impact on banks’ earnings from the recent 25bps OPR cut. Banks’ quarterly NIMs expected to normalize after 3 to 6 months from the repricing of deposits to lower rate. In the last rate cut of a similar quantum of 25bps in May 2019, most banks’ NIMs have recovered by as short as 3 months. Exhibit 2 shows that the 25bps reduction in the benchmark rate which will have a minimal impact on banks’ earnings of between 1 to 3% while the impact on Alliance Bank was the highest at 5.3% due to the timing of the OPR cut. The mildest impact was seen on Hong Leong Bank’s earnings. Based on our estimates, NIMs of most banks will be impacted by 2–4bps except for Alliance Bank. The impact of any OPR change will be short term (estimated 1 to 2 quarters) as repricing of deposits will eventually catch up with the changes in lending rates.

• Loan growth projection for the banking sector is maintained at 4.0% for 2020. Our loan growth projection is in line with GDP growth projection.

• Except for Public Bank which we have downgraded from BUY to HOLD, there are no downgrades to our rating for the other banks. The OPR cut will reduce our fair values for Maybank, Public Bank, Alliance Bank and BIMB Holdings as shown in Exhibit 2.

• We maintain OVERWEIGHT on the sector. Our top picks continue to be Maybank (FV: RM9.70/share), RHB Bank (FV: RM6.50/share) and Hong Leong Bank (FV: RM18.90/share). We continue to see valuations of banks compelling with the sector trading at average P/BV of 1.0x for FY20 while average dividend yields remain attractive at 5.3%.

Source: AmInvest Research - 23 Jan 2020