Investment Highlights

• Bank Negara Malaysia (BNM) announced a further reduction in OPR by 50bps to 2.00% from 2.50%. This brings the total reduction in benchmark interest rate to 100bps for 2020. The announcement was not surprising as we have expected the OPR in May 2020 to be lowered by at least 25bps (base case) to a worse case of 50bps reduction.

• At 2.00%, the OPR is equivalent to the lowest interest rate seen in the 2008-2009 financial crisis. We believe that market has already priced in expectation of the reduction in interest rates, hence it will not adversely impact the share prices of banking stocks.

• The central bank cited that the domestic economic conditions have been impacted by the Covid-19 pandemic with the movement control order (MCO) affecting production capacity and spending. Meanwhile, the labour market conditions are likely to have weakened.

• Moving forward, domestic growth and inflation will be key to any monetary policy changes. We see limitation of a further aggressive reduction in the OPR due to the weaker domestic currency.

• Each 25bps reduction in OPR will impact most banks NIM by 2-4bps and net profit by 1-3% as seen in Exhibit 2. As we have already imputed into our estimate of banks’ earnings 75bps reduction in OPR earlier, we are factoring in another 25bps cut into our projected net profit for banks. This has resulted in slight reduction to the fair value for Maybank, CIMB, Public and RHB Bank. The changes have not affected our stock recommendations.

• The statutory reserve requirement (SRR) has been kept unchanged at 2.00% while the MGS and Malaysian government investment issue (MGII) held by banks can now be accounted as part of the SRR compliance from 16 May 2020 until 31 May 2021. We understand that this measure will release RM16bil of liquidity into the banking system. It will an addition to the liquidity boost of RM30bil from the earlier measure announced on 19 Mar 2020 which lowered the SRR by 100bps to 2.00% and the flexibility granted to principal dealers until 31 Mar 2021 to recognise MGS and MGII as a part of their SRR compliance. The increase in liquidity in the market could further lower the funding cost for banks or encourage more holdings of MGS and MGII to generate interest income.
• We maintain NEUTRAL on the sector premised on weaker interest income from rate cuts and higher credit cost from external (Covid-19, lower oil prices) and domestic political uncertainties. Meanwhile, it remains unclear on whether interest for fixed rate HP and Islamic loans during the moratorium will be accrued or waived. If it is waived, this will have an impact on interest income of banks with the additional interest foregone and higher day 1 loss adjustment in 2Q2020. We continue to be selective in our recommendations with BUYs on Maybank (FV: RM8.50/share), RHB Bank (FV: RM5.70/share) and Hong Leong Bank (FV: RM15.90/share).

Source: AmInvest Research - 6 May 2020