Not surprising, BNM decided to cut the OPR by another 25bp. As usual, NIM will take a hit but we have already imputed the reduction into our CY20 financial assumptions. However, should there be a 5th cut, we will have to review our estimates again. Overall, we see Covid-19 related headwinds being balanced out by the sector’s undemanding valuations (P/B close to -2SD and lower than GFC’s level). Retain NEUTRAL and the only bank we like now is RHB (TP: RM5.80), primarily for its strong CET 1 ratio, relatively large untapped FVOCI reserves, and deflated valuations.

NEWSBREAK

At the Monetary Policy Committee (MPC) meeting yesterday, Bank Negara Malaysia (BNM) cut the Overnight Policy Rate (OPR) by another 25bp to 1.75%; this was in line with our economists’ expectation. Earlier during the year, there were 3 separate OPR reductions in January, March, and May, totalling to 100bp.

HLIB’s VIEW

Impact on banks. Observing the weak macro environment, we are not surprised that BNM decided to cut the OPR again. As usual, banks’ net interest margin (NIM) will take a hit. From our sensitivity analysis, we estimated every 25bp OPR reduction would see sector NIM contracting by 4-5bp and our profit forecast falling by c.4% (on a full year basis, without considering 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 previous OPR reduction? Studying the trends of May-20’s OPR cut, the weighted base rate (BR) and base lending rate (BLR) were down by 50bp and 48bp respectively, in line with the official 50bp cut. While for deposit, rates dropped by a similar quantum: (i) 1-3mths FD decreased 49-54bp, (ii) 6-12mths FD declined 49-53bp, and (iii) savings fell 16bp. Looking further back at May-19’s OPR cut, we noticed sector NIM in 2Q19 ticked down 6bp sequentially and widened in the following 2 quarters (due to downward re-pricing in deposits).

Forecast. Unchanged as we have factored 125bp OPR cut in our CY20 assumptions (YTD -125bp). Should there be a 5th cut, we will have to review our estimates again.

Retain NEUTRAL. Near-term Covid-19 related headwinds are being balanced out by the sector’s deflated valuations. For exposure, the only bank that we like now is RHB (BUY, TP: RM5.80) given its appealing risk-reward profile, backed by undemanding valuations, strong CET1 ratio of 16.6% (sector: 14.0%), and relatively large untapped FVOCI reserves. On the other hand, we have SELL ratings on Public (TP: RM14.80) and Affin (TP: RM1.55) for rich valuations and high portfolio concentration of HP loans respectively

Source: Hong Leong Investment Bank Research - 8 Jul 2020