BNM raised OPR by 25bps and this was earlier than expected. Banks are seen to benefit and NIM is expected to widen. We estimated every 25bps OPR hike would bump up sector NIM by 5-6bps and profit forecast by 4-5% (big gainers: Alliance, BIMB; small gainers: Affin, Public). However, forecasts are unchanged as we are planning to review this in the upcoming reporting period. Overall, we are still positive on banks. Thus, retain OVERWEIGHT and we have BUY ratings on Maybank, Public, RHB, BIMB, and Affin.
At the Monetary Policy Committee (MPC) meeting yesterday, Bank Negara Malaysia (BNM) raised the Overnight Policy Rate (OPR) by 25bps to 2.00%; this came in earlier vs our economic team’s expectations. We now expect BNM to raise OPR by another 50bps in 2H22, bringing it to 2.50% by end-2022.
Impact on banks. Banks typically gain from a rising interest rate environment. From our sensitivity analysis, we estimated that every 25bps OPR hike would expand sector net interest margin (NIM) by 5-6bps which in turn, bump up earnings forecast by 4-5% (on a full year basis, without taking into account of potential market-to-market losses and higher defaults); Alliance and BIMB would gain most while Affin and Public Bank are poise to benefit the least. Here we assumed a symmetrical 25bps rate increase for both variable loans and non-CASA deposits while all other factors were held constant. Besides, we used group figures in our analysis; thus, for banks with sizeable overseas operations (like Maybank and CIMB), the actual gain is likely to come in lower vs our calculations.
How did banks react to previous OPR hike? Studying the trends of Jan-18’s OPR hike, the weighted base rate (BR) and lending rate (BLR) were up 25bps and 21bps respectively, in line with the official 25bps increase. While for deposit, rates climbed by a similar quantum where 1-12mth FD jumped 22-23bps but savings only ticked up 6bps. In 1Q18 (previous 25bps OPR hike), we saw NIM rose 4bps sequentially and contracted in the following 2 quarters (due to upward re-pricing in deposits).
Forecast. Unchanged as we plan to review this during the upcoming reporting period, which is around the corner. In any case, we have broadly baked in NIM expansion of 2bps for FY22 (higher vs banks’ general guidance of flat to slight NIM slippage with 1 late rate hike expectation).
Maintain OVERWEIGHT. We believe the sector’s risk-reward profile is skewed to the upside as valuations are undemanding and we are only at the cusp of an OPR hike upcycle with economic recovery, which benefit banks. As such, we remain bullish and employ a rather broad stock buying strategy in 1H22. For large -sized banks, we like Maybank (TP: RM9.40) for its strong dividend yield and Public Bank (TP: RM4.80) for its large potential headroom to perform management provision overlay writebacks. For mid-sized banks, RHB (TP: RM7.00) is favoured for its high CET1 ratio and attractive price-tag. As for small-sized banks, BIMB (TP: RM3.45) and Affin (TP: RM2.35) are preferred; we like the former for its positive structural growth drivers and better asset quality while the latter has special dividends potential and strong financial metrics.
Source: Hong Leong Investment Bank Research - 12 May 2022
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