The 25bp cut in OPR has a slight negative impact on banks. We believe Alliance and BIMB would lose most in a falling interest rate environment while Affin and AMMB are least affected. During the last OPR cut, 3Q16 sector NIM only nudged down 1bp sequentially. Retain NEUTRAL since valuation is discounted at -1SD to its 5-year mean P/B. Our preferred pick is Maybank (TP: RM10.50). Other BUY calls are RHB (TP: RM6.60) and BIMB (TP: RM5.20).

NEWSBREAK

At the Monetary Policy Committee (MPC) meeting yesterday, Bank Negara Malaysia lowered the Overnight Policy Rate (OPR) by 25bp to 3.00%. The last cut was back in Jul-16, of similar 25bp quantum.

HLIB’s VIEW

Impact on banks. Typically, banks in Malaysia will lose from a falling interest rate environment. The impact of an OPR cut on banks is largely dependent upon the: (i) composition of variable and fixed rate loans, (ii) proportion of current account, savings account (CASA) and other deposits, (iii) non-interest income ratio, coupled with (iv) percentage exposure to overseas market. Biggest losers would be banks with high mix of variable loans and CASA, low non-interest income ratio and low percentage exposure to overseas market. From our sensitivity analysis, Alliance and BIMB would lose most in a falling interest rate climate while Affin and AMMB are least affected. We assumed a symmetrical 25bp rate cut for both variable loans and non-CASA deposits while all other factors were held constant in our financial model. Besides, we used group figures in our analysis; hence, for banks with sizeable overseas operations (like Maybank and CIMB), the actual impact is likely to be lower than our calculations.

How did banks react to the last OPR cut? Studying trends of the previous reduction in OPR, we noticed that the weighted base rate (BR) and base lending rate (BLR) were only down by 22bp and 17bp respectively, not matching the official 25bp cut. While for deposit, rates were generally reduced by a lower quantum: (i) 1-3mths FD declined 21-25bp, (ii) 6-12mnths FD decreased 21-22bp, and (iii) savings contracted 12bp. In 3Q16 (during the previous 25bps OPR cut) we saw sector net interest margin (NIM), tick down a mere 1bp sequentially and expanded in the following 2 quarters (due to downward re-pricing in deposits).

Forecast. Unchanged although we have not considered an OPR reduction in our NIM estimates. We will review this during the respective individual banks’ reporting period, which is around the corner. However, we note that the previous rate cut only resulted in a marginal negative NIM impact, as highlighted above; there could be chance that NIM pressure could be mitigated by less intense deposit competition (we noticed high promotional FD rate campaigns have abated, indicating that banks are wary of the situation and started to price in lower interest rates). Also, banks are tilting their books toward better yielding assets like SME lending.

Maintain NEUTRAL. Still no catalysts to spur strong sector-wide growth in the offing. That said, current valuation is fair as it is discounted at -1SD to its 5-year average P/B. Our preferred pick is Maybank (TP: RM10.50) given its good dividend yield and low foreign shareholding level vs larger domestic peers. Other BUY recommendations are RHB (TP: RM6.60) and BIMB (TP: RM5.20).

Source: Hong Leong Investment Bank Research - 8 May 2019