As BNM raises the OPR by 25bps, we expect Malaysian banks to benefit marginally. Based on our simulation, Alliance Bank benefits the most given its high variable rate loan portfolio (90%), combined with a CASA ratio of 35%. In the absence of intense price competition, we believe that banks’ NIM will also see some marginal expansion Maintain OVERWEIGHT. Top picks: Hong Leong Bank and Maybank.

The Overnight Policy Rate (OPR) Was Raised by 25bps to 3.25%

As expected Bank Negara raised the OPR by +25bps to 3.25%, since it last cut the OPR by 25bps back in July 2016. In the MPC statement, BNM cited that the normalization was to prevent the build-up of risks in the financial system after a prolonged period where rates were below the normalized 3.5%. Accordingly, BNM sees a more sustained and synchronized global economic growth and expansion. Malaysia’s economic growth is expected to continue in 2018, underpinned by strong domestic activities, strength in exports, favourable income and labour market.

Rate Hike Not Expected to Have Significant Impact on Banks’ Profits

In our view, the degree of normalization in interest rates is not expected to result in a material impact on the banks’ bottomline, ranging from 0.7-3.5%, as the initial repricing effect on variable rate loans will be gradually offset by repricing of the fixed deposits, which still make up a large chunk of most banks’ deposit base. Secondly, the degree of normalization in interest rates is not expected to cause default rates to spike among borrowers (as the impact is expected to be benign while fundamentals in the economy remains strong on the back of a synchronized global growth).

Alliance, Maybank, RHB, Public, Hong Leong Bank Clear Winners

The clear-cut winners (Fig 1-2) (more asset-sensitive balance sheets) are Alliance Bank (which has 90% variable rate loans in its portfolio; 35.3% CASA ratio) and is entirely domestic-centric, RHB Bank (82.5% variable rate loan portfolio; 27% CASA ratio), Maybank (71% variable rate loan portfolio; 35% CASA ratio), Public Bank (76.9% variable rate loan portfolio; 25.5% CASA ratio) and Hong Leong Bank (76.5% variable rate loan portfolio; 26.8% CASA ratio). Meanwhile, AMMB may see a neutral impact from the repricing in variable rate loans as it also has a high percentage of fixed deposits (at 79.2% of its deposit base). On the other hand, CIMB which has a higher percentage of overseas loans (43% of loan book) may not likely see a meaningful impact of the OPR hike on its 2018E net profit due to impact of NIM compression from its Indonesian unit.

Source: Affin Hwang Research - 26 Jan 2018