Highlights

Given imminent rate hike, revisit potential impact on banks.

In general, banks with higher floating loans percentage (Figure #1) will benefit as these assets are re-priced instantly.

Meanwhile, banks with higher percentage of CASA (Figure #2) will also benefit despite immediate re-pricing as rate adjustment is normally half of BLR/FD rates adjustment.

However, these measurements do not provide the timing of re-pricing which means that they are only good as an indication but not suitable to undertake earnings sensitivity.

The best measurement to undertake such study would be to look at the interest rate sensitivity gap (i.e. the amount of assets and liabilities which will be re-priced within a certain period of time). Figure #3 is a summary of such gap. In general, banks with higher positive gap (more assets then liabilities) in the shorter re-pricing period (up to one-month) will benefit more. This is because of significantly more assets then liabilities that will be re-priced within a month.

Comment

Figure #3 shows that all banks have positive gap in onemonth but negative gaps in 1-3-month and 3-12-month. This suggests that the initial benefit from the positive gap is temporary and will eventually be eroded by the subsequent re-pricing of more liabilities (vis-à-vis assets).

Figure #4 shows that the main beneficiaries are Maybank, AFG and Public although all banks would benefit.

Regardless of the potential impact (which is minor at 0.3- 2.2%), investors should not get overexcited as competitive pressure is likely to erode the potential benefit from a rate hike. This was evident during the period between May 2010 to May 2011 whereby OPR was hiked from 2% to 3% but NIM did not improve but rather decline further due to competitive pressure (Figure #5).

Historically, rates hikes tend to increase volatility in the sector. Figure #6 shows that, on average, the Finance index would gain by 1.8% 1-month after but would subsequently fall to -1.3% by the 4th month before resuming uptrend from the 5th month onwards on more entrenched growth.

Thus, maintain Neutral call on the sector given that although rate hike is positive on perception and sentiment, it is unlikely a re-rating catalyst as potential benefit is still suspect.

Risks

Risk of recession and its impact on asset quality, portfolio losses (MTM and realized), non-interest income growth as well as more macro prudential measures.

Rating

NEUTRAL

Positives – Best proxy to the impact of ETP (sector with third highest multiplier effect), domestic consumerism (albeit slower) and economy, strong asset quality, robust capital ratios, capital management and M&As.

Negatives – Competitive pressure on margin, potential of higher living costs which would increase the possibility of rise in delinquencies, portfolio losses from foreign outflow and rising burden of low income group.

Top Picks

Maybank, RHB Cap and AFG.

Source: Hong Leong Investment Bank Research- 9 Jul 2014