Our NEUTRAL call on the Banking sector remains unchanged as short-term gains from the increase in OPR may be capped by long-term concerns. Alliance Financial Group (AFG, OP,TP: RM5.25) will likely gain the most given its more favourable loan and deposit profile. Other OUTPERFORM calls are BIMB (TP: RM4.55), MAYBANK (TP: RM11.20) and PBBANK (TP: RM21.90) while NEUTRALs are AFFIN (TP: RM4.00), AMMB (TP: RM7.80), CIMB (TP:RM8.00), HLBANK (TP: RM15.20) and RHBCAP (TP: RM8.75).
Short-term Gains. Bank Negara Malaysia raised the Overnight Policy Rate (OPR) yesterday to 3.25% (from 3.00%), marking its first rate increase since May 2011. We believe the development is short-term positive to Malaysian banks as Net Interest Margin (NIM) will expand following the almost immediate re-pricing upwards of floating-rated loans and the lag in the repricing of fixed-rated deposits (FD). Negligible increases in costs relating to demand and saving deposits (CASA) also support the NIM expansion.
However, differences in the loan and deposit profiles of banks mean that some will gain more while others less. Based on latest reported results, Alliance Financial Group Berhad (AFG) and Hong Leong Bank Berhad (HLBK) had the highest percentage composition of domestic floating rated loan as at 31 March 2014. Meanwhile, AMMB Holdings Berhad (AMMB) and RHB Capital Berhad (RHBCAP) took the cake in terms of highest percentage composition of FD and CASA.
AFG the ultimate beneficiary? According to our analysis (see Table 3), AFG emerges as the biggest beneficiary with some 90% of its loans being floating-rated and >30% of its deposits are in the form of CASA. We estimate that the OPR hike will result in an increase in its interest yield by 15-17bps. As a result, AFG’s net interest margin is expected to expand the most, all else being equal. The positive impact of the rate hike could be bigger if and when we see more rate hike in future.
More Mark-To-Market Losses? On the downside, domestic held-for-trading (HFT) and available-for-sales (AFS) debt instruments are poised to register a one-time mark-to-market loss due to the mild rate hike. At first glance (see Table 3), Public Bank (PBBANK) will be the least impacted as it has the lowest percentage composition of HFT and AFS against its total assets, while the most affected would be BIMB. However, given the high volatility nature of this asset class, assessing this segment may be difficult. Nonetheless, given that the contribution of non-interest income usually more significantly more than 30% of the total income, the unrealised loss impact may not be as material as first thought.
The longer term impact of the rate hike, although not as clear, may also lean to slightly negative. Higher lending rates may dampen credit demand hence loans growth. Besides, the trend could lead to a smaller pool of borrowers, causing competition to intensify and Average Lending Rates (ALR) to decline. Hence, any short-term gains in NIM may potentially be lowered if not wiped out. This may cause NIM to fall below pre-OPR hike levels once FD rates adjust to the new higher rates (six to 12 months down the road). Historical data of ALR vs. OPR (as depicted below) seem to support this where ARL continued on a downwards trend despite OPR being raised in 2010 Furthermore, higher interest rates will likely also result in higher credit costs as non-performing loans increase. This, in turn, may result in banks tightening their credit scoring and approval criteria, which will impact on loans growth.
Source: Kenanga