- Despite a possible rate hike, banks’ share prices may remain unmoved due to five main reasons. There is now increasing possibility of an interest rate hike in the upcoming 10 July monetary policy meeting. However, despite hints of a possible interest rate hike ahead, banks’ share prices have failed to rerate this time, unlike in 2010. In the past, banks’ share prices had usually rerated, led by short-term uplift to net earnings due to lag impact from deposit repricing. The banks that are expected to benefit the most are AFG with a potential short-tem earnings upgrade of 3.8%, PBB (2.3%), and HLBB (1.7%). We believe that share prices may remain unmoved for five unique reasons during the current cycle.

- First is a much higher LDR. The first is a much higher loan-to-deposit ratio (LDR) for the industry, compared to four years ago in 2010. A higher LDR essentially reduces the positive impact from repricing of loans, as there is also a corresponding repricing effect from deposits.

- Secondly, higher net interbank borrowing position. Most of the banks are now larger interbank borrowers, while none are net interbank lenders, unlike the case in 2010. This essentially means higher interbank interest expense, should a rate hike occur, while none of the banks are positioned to enjoy larger interest income from net interbank lending.

- Thirdly, interbank rates have started to rise since seven months ago. Interbank rates have started to rise in the past seven months, since November 2013. As an indication, the 3-month interbank rate has now surpassed 3.30%, which is about 20bps higher than the 3.10% level seen before November 2013. Thus, we believe any rate hike ahead may be viewed as compensation for the already elevated cost of funds for the interbank market.

- Fourthly, greater competition for non-retail deposits in the past six months. Based on latest indications, we believe non-retail deposits rates have intensified in the last six months since end-2013. This is due to more demanding cash-rich corporate depositors, whereby money market deposit rates have risen by about 20bps to 3.4%-3.5% from ~3.2% at end-2013.

- Fifthly, evidence of intensifying competition for retail deposits as well. Even for banks with a higher portion of retail deposits, we see no major relief from deposit rate pressure, as current campaigns for fixed deposits are pricing fixed deposit rates at at least 30bps higher than board rates. Thus, to conclude, we view any rate hike ahead as an offsetting compensation for the potential downgrade in net earnings that may have occurred due to higher cost of funds. Maintain NEUTRAL on sector. 

Source: AmeSecurities