Not surprising, BNM raised OPR by a further 25bps. Overall, banks are still net beneficiaries as NIM is anticipated to widen. Every 25bps OPR hike would boost sector NIM by 5-6bps and profit forecasts by 4-5% (big gainers: Alliance, BIMB; small gainers: Affin, Public). No change to estimates and we still view positively the banking sector and opine the risk-reward profile is tilted to the upside. Keep OVERWEIGHT; BUY calls include: Maybank, RHB, BIMB, Affin, Alliance.

NEWSBREAK

At the MPC meeting yesterday, BNM raised the OPR by 25bps to 2.50%; this was in line with our economists’ expectations. For the remainder 2H22, we see BNM staying pat on their monetary policy.

HLIB’s VIEW

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 benefit most while Affin and Public are poised to gain the least. Here we assumed a symmetrical 25bps rate increase for both the 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 business (like Maybank and CIMB), actual gains are likely to be lower vs calculations.

How did banks react to previous OPR hike? Studying the trends of May -22’s OPR hike, the weighted base rate (BR) and lending rate (BLR) increased 25bps and 24bps respectively, in line with the official 25bps uptick. While for deposit, rates climbed by a similar quantum where 1-12mth FD jumped 21-24bps but savings only ticked up 6bps. In turn, 2Q22 sector NIM rose 5bps sequentially.

Impact from CASA substitution to FD. We note sector CASA ratio is high at 32% vs pre-pandemic level of 26%. We estimated every 1% CASA ratio reversal would drag sector NIM by 2bps and earnings by 1%, assuming an FD-CASA spread differential of 200bps. From our compilation, Alliance and Maybank saw their CASA ratio escalated up the most (by 10-13ppt) vs peers (by 7ppt) from 4Q19 to 2Q22 while Affin and BIMB experienced the least built-up (by 2-3ppt). However, if a full CASA reversion scenario plays out, it will only neutralize gains from 75bps OPR increase. So far, BNM has only raised OPR by 75bps vs a total 125bps reduction during the Covid-19 pandemic era, suggesting room for more rate hikes and a series of this, aids consecutive widening in NIM. Overall, banks are still net beneficiaries.

Forecast. Unchanged as the OPR increase was within expectations.

Retain OVERWEIGHT. We still view positively the banking sector and opine that the risk-reward profile is skewed to the upside; the combination of robust profit growth and undemanding valuations will be impetus driving performance. For large-sized banks, we like Maybank (TP: RM9.70) for its strong dividend yield. For mid-sized banks, RHB (TP: RM6.60) is favoured for its high CET1 ratio and attractive price point. For small sized banks, all three under our coverage are Buy calls for different reasons: (i) BIMB (TP: RM3.00) for its laggard share price showing, (ii) Affin (TP: RM2.35) is adored for its special dividends potential and strong financial metrics, (iii) Alliance (TP: RM4.05) for its cash dividend yield of 6-7% and large management provision overlay buffer.

Source: Hong Leong Investment Bank Research - 9 Sept 2022