News

• OPR hike by 25bps. BNM Monetary Policy Committee decided to raise overnight policy rate (OPR) by +25bps to 3.25% yesterday. The last time BNM cut the OPR was in July 2016, by -25bps to 3%. Correspondingly, the floor and ceiling rates of the corridor for the OPR were raised to 3% and 3.50% respectively.

Comment

• Positive but not unexpected. The rate hike is not surprised given the strength in the export and domestic activities. Recall in our sector report dated 5 th Jan 18, we highlighted the rate hike may come as early as Jan-18. We expect the latest move is positive to the sector’s earnings, as banks will start to reprice loans and deposits immediately. The timing gap between repricing of loans and deposits will result in uplift to NIM temporarily before it normalizes back (due to competitions and repricing impact). We expect the +25bps hike in OPR will boost sector earnings by 2-3%, whilst we expect potential up to +2.5% uplift to bottomline for ABMB, +2.1% for RHB and CIMB respectively.

• Repricing of loans. We expect banks to reprice variable rate loans almost immediately, hence banks with larger composition of variable loans should benefit to bottomline in a rising interest rates environment.

• Repricing of deposits. Banks with larger proportion of CASA should be able to better manage cost of funds as CASA is the low-cost funding sources. The repricing of fixed deposit will start immediately, however the impact could only be felt after 3-9 months given the maturity of the fixed deposits.

• Watch on asset quality. The repricing of loans will drive higher monthly repayment for variable rate loans. Thus the issue of affordability to service loans will arise. However, we view that the +25bps increase is manageable and the likehood of higher NPL is minimal at this stage.

Risks

• The downside risks to our call are (1) significant deterioration in asset quality, and (2) further weakening of loan growth 3) severe NIM compression.

Rating

OVERWEIGHT ( ↔ )

• We stay OVERWEIGHT on banking sector due to 1) improving ROE (led from recovery of earnings) 2) improving NOII income 3) stable asset quality 4) Less severe of MFRS9 impact

Top Picks

• Maybank (BUY, TP: RM10.70), and RHB (BUY; TP: RM5.60).

Source: Hong Leong Investment Bank Research - 26 Jan 2018