As expected, BNM decided to cut OPR by 50bps and most banks have seen this coming. Hence, earnings impact should be less severe this time around as fixed deposit repricing is also quicker, given c.80% expiring by Jun-20. That said, our economics team thinks it is possible for another 25bps cut in 2H20. Overall, we see Covid-19 related headwinds being balanced out by the sector’s inexpensive valuations (P/B is below -2SD and GFC’s level). Retain NEUTRAL and we like banks that were acutely bashed down; preferred picks are CIMB (TP: RM4.45) and Alliance (TP: RM2.35). Other BUY calls are RHB (TP: RM5.40) and BIMB (TP: RM3.70).

NEWSBREAK

At the Monetary Policy Committee (MPC) meeting yesterday, Bank Negara Malaysia (BNM) cut the Overnight Policy Rate (OPR) by another 50bps to 2.00%; this was in line with our economists’ expectation. Recall, there were 2 earlier OPR reductions this year in Jan and Mar (-25bps each).

HLIB’s VIEW

Impact on banks. Considering the confluence of events from Covid-19 and imminent recession, we are not surprised that BNM decided to cut OPR again. As usual, banks’ net interest margin (NIM) will take a hit. However, impact to bottom-line should be less severe this time around as fixed deposit repricing is quicker (c.80% will be expiring by Jun-20). Also, most banks saw this coming and have been proactively managing their fixed deposits level to prevent exposure. That said, our economists think it is possible for another 25bps cut in 2H20. From our sensitivity analysis, we estimated every 25bps cut in OPR would see sector NIM contracting by 4-5bps and our profit forecast falling by 3-4% (on a full year basis, without accounting for 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 previous OPR reduction? Studying the trends of Jan-20’s OPR cut, 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 dropped by a similar quantum: (i) 1-3mths FD decreased 23-25bps, (ii) 6-12mths FD declined 22-23bps, and (iii) savings fell 8bps. Looking further back at May-19’s OPR cut, we noticed sector NIM in 2Q19 ticked down 5bps sequentially and widened in the following 2 quarters (due to downward re-pricing in deposits).

Forecast. Unchanged as we have factored 100bps OPR cut in our CY20 assumptions (YTD -100bps). Should there be a 4th cut, we will have to review our estimates again.

Keep NEUTRAL. The OPR cut is a non-event, since it was largely expected. Overall, we see Covid-19 related headwinds being balanced out by the sector’s inexpensive valuations. We like banking stocks that were acutely bashed down and especially those with P/B below 1.00x, GFC’s trough, and -2SD; two of our BUY calls meeting this criteria are CIMB (TP: RM4. 45) and Alliance (TP: RM2.35), making them our preferred picks. Other BUYs are RHB (TP: RM5.40) and BIMB (TP: RM3.70).

Source: Hong Leong Investment Bank Research - 6 May 2020