Highlights

• Bank Negara Malaysia (BNM) reduced overnight policy rate (OPR) by 25bps to 3%.

• This is the first OPR cut since Feb-09. Recall, the most recent OPR cut was made in Feb-09 (by 50bps to 2%). Since then, OPR was raised 5 times (25bps each time, in Mar-10, May-10, Jul-10, May-11, and Jul-14, respectively).

Our Take

• Impact. While an OPR cut is generally negative to the sector, the maturity profile of the asset and liability will give a better indication on the potential impact. Based on our estimates, a 25bps cut in OPR will be negative to Public, Maybank, RHB and Affin (due to negative balance sheet gap, measured by asset minus liability), but positive to AMMB and AFG due to positive balance sheet gap (see Figure 1 for details).

• Maintain our earnings forecasts for the sector, as: (1) Our analysis above is based on the assumptions that banks will lower base rate (BR) by 25bps but lower deposit rates by 12.5bps, and a change in maturity profile over time (depending on consumer behavior). Should deposit rates reduce by the same magnitude as the OPR cut, the impact on banks’ earnings would be slightly more positi ve than the former (see Figure 2); and (1) The OPR cut will safeguard domestic growth momentum, hence reducing likelihood of further deterioration i n banks’ asset quality. Besides, we note that the potential impact of the OPR cut to banks’ earnings is relatively insignificant.

• Maintaining Neutral stance on the sector, as the absence of near-term positive catalyst is offset by the inexpensive valuations (in terms of P/B ratios).

Risks

• Risk of recession and its impact on asset quality, portfolio losses (MTM and realized), non-interest income growth, further rate cut.

Rating

NEUTRAL

• Positives – Best proxy to 11MP and RAPID, domestic consumption (albeit slower) and economy; strong asset quality; robust capital ratios; and capital management.

• Negatives – Competitive pressure on margin, GST impact on consumer sentiment, tougher envi ronment increase chances of higher defalts and port folio losses from foreign outflow.

Top Picks

• Maybank (BUY; TP: RM9.33) and RHB Bank (BUY; TP: RM5.35)

Source: Hong Leong Investment Bank Research - 14 Jul 2016