Investment Highlights

• Bank Negara Malaysia (BNM) announced a further 25bps increase in the interest rate, raising the OPR to 2.5% from 2.25%. This was expected given that movements in the 3-month KLIBOR and the 1-year swap rates, which had already priced in the rate hike. Exhibit 6 shows the 3-month KLIBOR that closely tracks changes in the OPR.

• The rate hike was in line with the earlier MPC statement that the degree of monetary policy normalisation will be done on a measured and gradual manner. We see the likelihood for another OPR increase by 25bps in the next MPC meeting in Nov 2022 to raise the benchmark interest rate to 2.75%. The OPR is expected to gradually increase to 3.00% (the pre-pandemic level) in 1Q2023. Supported by a higher quantum of rate hikes, we expect the net interest income of banks to be stronger in 2H22 compared to 1H22.

• In line with other central banks’ actions globally to tighten monetary policies and tame inflation. Central banks globally are still on course to tighten monetary policies (Exhibit 5). The latest sharp rate increase of 75bps was just announced by the European Central Bank. For the US, our economics team expects a further increase in the interest rate by 50bps in Sep 2022, 25–50bps in Nov 2022 and another 25bps in Dec 2022 to lift the Fed rates to 3.5–3.75% by year-end. This follows the steep Fed rate increase of 75bps each in the months of June and July 2022.

• BNM highlighted downside risks to the domestic economy from a weaker-than-expected global growth, further escalation of geopolitical tensions and worsening of supply chain disruptions. Nevertheless, the overall tone of the central bank inferred from the latest MPC statement was not too dovish in our opinion. The domestic economy will continue to be on a growth trajectory supported by private sector spending after the transition to an endemic phase. However, external demand will moderate ahead due to the slowdown in global growth.

• We make no changes to our recommendations and earnings forecast of banks. We have already factored in the latest OPR hike of 25bps into our projected net profit of banks for 2022. Exhibit 3 shows the impact analysis of a 25bps hike in the OPR which will positively impact banks’ NIM by an average of 5–6bps and net profit by 3%. This is based on the assumption that the deposit repricing of banks will lag behind the adjustment in loan rates by 6 months.

• Retain our OVERWEIGHT stance on the sector with our top BUYs on RHB Bank (fair value RM7.40/share), CIMB Group (FV RM6.70/share) and Maybank (FV RM10.30/share).

Source: AmInvest Research - 9 Sept 2022