BNM increased OPR by a further 25bps. Overall, banks are still short-term 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 2.75%. For 2023, our economists see BNM hiking OPR by another 50bps to reach 3.25%.

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 Sep-22’s OPR hike, the base rate (BR) and lending rate (BLR) increased 25bps 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 7bps. Looking further back at May-22’s OPR hike, we saw 2Q22 sector NIM rose 5bps sequentially.

Impact from CASA substitution to FD. We note sector CASA ratio remains high at 31% against pre-pandemic level of 26%. 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 neutralize gains from 75bps OPR hike. So far, BNM has raised OPR by 100bps against a total 125bps reduction during the Covid-19 pandemic era. This suggests room for lesser rate hikes going forward, hurting NIM if CASA consumption happens later on and competition for FD escalates further. That said, banks are still short-term net beneficiaries given loan-deposit repricing time differences.

Forecast. Unchanged as we plan to review this during the upcoming reporting period, which is around the corner.

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 buffe

Source: Hong Leong Investment Bank Research - 4 Nov 2022