Bank Negara Malaysia (BNM), contrary to consensus expectations, raised its overnight policy rate (OPR) by 25 basis points (bps) to 2.00% from the record low of 1.75%. This comes hot on the steps of the US Federal Reserve which raised its benchmark interest rate by 0.5% to a target rate range of between 0.75% and 1.00% recently. The move, we understand, is to rein in inflationary pressure due to a rise in commodity prices, strained supply chains and strong demand conditions, particularly in the US. That said, BNM is cognizant that risks to growth remain, which include a weaker-than-expected global growth, further escalation of geopolitical conflicts, worsening supply chain disruptions, and adverse developments surrounding COVID-19. It is projecting headline inflation between 2.2% - 3.2% in 2022. Although the rate adjustment would increase the funding costs of some REITs (those with floating rates), the impact is minimal at ~2%, by our estimates. All told, we keep our earnings estimates unchanged for now. With narrowing spreads (10-year MGS at 4.4%, from c.3.2% a year ago), we believe the sector is fairly valued for now. We maintain our Neutral stance.

• Surprise 25bps hike. While risks to growth remain, stemming from weaker-than-expected global growth, further escalation of geopolitical conflicts and worsening supply chain disruptions, BNM still believes that the economy is on a firmer footing domestically, supported by easing of restrictions and better investment prospects. Therefore, the central bank feels it is opportune to start normalizing interest rates by announcing the first OPR hike since the onset of the COVID-19 pandemic. Recall that BNM had slashed the OPR by a cumulative 125bp to a historic low of 1.75% during the course of the COVID-19 pandemic period.
• Minimal impact to the REITs under coverage. Among the REITs under our coverage, Sunway REIT’s floating rate loans are at c.62%, with Axis REIT at c.32%. IGB REIT’s debt is all at fixed rates. Interest costs are estimated to be higher by between 1% and 2% with this increase in OPR, by our estimates.

Source: PublicInvest Research - 12 May 2022