Investment Highlights

• Year to date (YTD), the 10-year MGS yield has declined circa 43bps to 2.87%. We believe that this was due to the novel coronavirus (nCoV) outbreak, causing investors to turn more cautious with an increase in demand for bonds. Nevertheless, the drop in yield is expected to result in positive revaluations or mark-to-market gains in bonds held by banks. This is anticipated to lift banks’ non-interest income (NOII) in 1Q20 and mitigate some of the impact from the recently announced OPR cut of 25bps on 22 Jan 2020 on net interest income (NII).

• Room for further rate cuts but this will depend on the severity of the coronavirus outbreak and if it poses further risk to domestic economic growth. The OPR reduction of 25bps on 22 Jan 2020 was accelerated even though the market had widely expected it to be announced later in 2020. It was a preemptive rate cut and likely to be due to the nCoV outbreak. Moving forward, BNM has highlighted that its monetary policy considerations will be guided by the risk to the domestic growth and inflation. Should the spread of the nCoV be contained by 1Q20, coupled with the announcement of stimulus package to boost the aviation, retail and tourism sectors affected by the virus by the end of Feb or early Mar 2020 as reported by the media, we believe it is possible that further rate cuts could be held back. In the event that the effects from the stimulus package kick in fast, we believe that it could potentially be more impactful in lifting consumer confidence than just cutting interest rates further.

• Acceleration of work for large infrastructure projects will be helpful to support 2020 GDP growth and minimize downside risk. The central bank highlighted that the resumption of large infrastructure projects (MRT2, Pan Borneo, LRT3, Gemas-JB Double Track and ECRL) will contribute circa 1ppt to growth.

• Our GDP growth for 2020 is now revised to 4.0% from 4.6% earlier. Despite the weaker 4Q19 GDP growth at 3.6% in 4Q19, the full-year 2019 GDP expansion of 4.3% was line with the central bank’s guidance of 4.3% to 4.8%. Our loan growth expectation for the sector remains at 4.0% for 2020.

• Mild impact on banks’ earnings for every 25bps cut in OPR. In the last rate cut of 25bps in May 2019, most banks’ NIMs have recovered by as short as 3 months. Exhibit 2 shows the simulation of a 25bps reduction in the benchmark rate which will have a minimal impact on most banks’ earnings of between 1% and 3% while the impact on most banks NIMs will be 2–4bps. The impact of any OPR change will be short term (estimated 3 to 6 months) as the repricing of deposits to lower rates will eventually catch up with the drop in lending rates. The silver lining to this is the aforementioned potential unrealized mark-to-market gains on bonds as well as realized gains from any sale of securities benefitting from the decline in yields. This will mitigate the impact of OPR cuts while supporting banks’ ROEs and share prices.

• We maintain OVERWEIGHT on the sector. As we are already in the results season, we leave our forecast unchanged for now and look closely to managements’ guidance for FY20. 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 an average P/BV of 1.0x for FY20 while average dividend yields remain attractive.

Source: AmInvest Research - 13 Feb 2020