The 25bp cut in OPR this time around should be less profound vis-à-vis May- 19’s reduction, since it was well anticipated by banks. Hence, NIM recovery will also be quicker (most impacted: Alliance, BIMB; least impacted: Affin, AMMB). On the brighter side of things, the OPR cut in early 2020 will help to remove one major share price overhang; now, banks can plan better to improve NIMs for the subsequent 3 quarters of 2020. Maintain NEUTRAL view on the sector and our preferred pick is Maybank (TP: RM9.05). Other BUY calls are RHB (TP: RM6.20), CIMB (TP: RM5.70), BIMB (TP: RM4.80), and Alliance (TP: RM3.15).

NEWSBREAK

At the Monetary Policy Committee (MPC) meeting yesterday, Bank Negara Malaysia lowered the Overnight Policy Rate (OPR) by 25bps to 2.75%; this was well within our economists’ expectation. The last cut was back in May-19, of similar 25bps quantum.

HLIB’s VIEW

Impact on banks. Although banks in Malaysia typically will lose from an OPR cut, the impact this time around should be less profound vis-à-vis May-19’s reduction, since it was well anticipated by banks. We noticed deposits growth have tapered (Nov-19: +2.6% YoY) due to tepid fixed deposits built-up as banks deliberately managed these lower to prevent overexposure ahead of the OPR cut. Hence, we believe net interest margin (NIM) recovery will also be quicker.

From our sensitivity analysis, we estimate every 25bp cut in OPR would see sector NIM contracting by 3-4bp and our profit forecast reducing by 2-3% (without taking into account of potential mark-to-market gains and lower defaults); Alliance and BIMB would lose most 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. Also, 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 last reduction in OPR, the weighted base rate (BR) and base lending rate (BLR) were down by 25bp and 21bp respectively, in line with the official 25bp cut. While for deposit, rates were reduced by a similar quantum: (i) 1-3mths FD decreased 24-26bp, (ii) 6-12mnths FD declined 24-25bp, and (iii) savings fell 8bp. In 2Q19 (OPR cut in May-19), sector NIM ticked down 5bp sequentially and widened in the following quarter (due to downward re-pricing in deposits).

Forecast. Unchanged as we have largely factored in NIM compression of 2-3bp into our financial models. We will review this further during the respective individual banks’ reporting period, which is around the corner.

Maintain NEUTRAL. On the brighter side of things, the OPR cut in the early part 2020 will help to remove one major share price overhang. Looking ahead, our economics team is staying pat on their OPR outlook for 2020 (i.e. no further cuts for the year) unless the global climate deteriorates and causes a negative spill over to Malaysia. Now, banks can plan better to improve NIMs for the subsequent 3 quarters of 2020. However, the growth outlook for banks is still modest. We draw comfort from the sector’s cheap valuations as it is trading near -2SD to its 5-year average P/B. Our preferred pick is Maybank (TP: RM9.05) given its good dividend yield and low foreign shareholding level vs larger domestic peers. Other BUY calls are RHB (TP: RM6.20), CIMB (TP: RM5.70), BIMB (TP: RM4.80), and Alliance (TP: RM3.15).

Source: Hong Leong Investment Bank Research - 29 Jan 2020