Unsurprisingly, BNM decided to cut OPR again by 25bps and most banks have already anticipated this. Hence, they were not caught off-guard and still able to actively manage their fixed deposits level to prevent overexposure. That said, our economist expects a 3rd OPR reduction as early as May MPC meeting (most impacted: Alliance, BIMB; least impacted: Affin, AMMB). As a result, the growth outlook for banks is still modest but we draw comfort from the sector’s cheap valuations as it is trading near -2SD to its 5-year average P/B. Retain NEUTRAL view on the sector and our preferred pick is CIMB (TP: RM5.50). Other BUY calls are RHB (TP: RM6.00), BIMB (TP: RM4.50), and Alliance (TP: RM3.05).

NEWSBREAK

At the Monetary Policy Committee (MPC) meeting yesterday, Bank Negara Malaysia (BNM) cut the Overnight Policy Rate (OPR) by another 25bps to 2.50%; this was in line with our economists’ expectation. The last reduction was back in Jan-20 (-25bps).

HLIB’s VIEW

Impact on banks. Considering the series of events that took place recently, we are not surprised BNM decided to reduce OPR again. As usual, banks will lose from this. However, most of them have already anticipated another round of cut (as highlighted in their 4Q19 results conference calls last week) and were still able to actively manage their fixed deposits level to prevent overexposure (for quicker repricing). That said, our economist sees a 3rd OPR cut as early as May MPC meeting. From our sensitivity analysis, we estimate every -25bps cut in OPR would see sector NIM contracting by 4-5bps 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 25bps 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 25bps and 21bps respectively, in line with the official 25bps cut. While for deposit, rates were reduced by a similar quantum: (i) 1-3mths FD decreased 23-25bps, (ii) 6-12mnths FD declined 22-23bps, and (iii) savings fell 8bps. In 2Q19 (OPR cut in May-19), we noticed sector NIM ticked down 5bps sequentially and widened in the following 2 quarters (due to downward re-pricing in deposits).

Forecast. Unchanged as we have already factored in 2 rounds of -25bps OPR cut in our CY20 assumptions. Should there be a 3rd cut, we will have to review our estimates again.

Retain NEUTRAL. While the market has correctly speculated that there is a 2nd OPR cut, now there is risk of a 3rd reduction seeing: (i) the potential of Covid-19 becoming more persistent and prolonged beyond 1Q20 coupled with (ii) the lingering uncertainty created from our still fragile political landscape, could leave a protracted impact on the economy. Hence, 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 CIMB (TP: RM5.50) given its above average growth and inexpensive valuations vs larger peers. Other BUY ratings include RHB (TP: RM6.00), BIMB (TP: RM4.50), and Alliance (TP: RM3.05).

Source: Hong Leong Investment Bank Research - 4 Mar 2020