Our NEUTRAL call on the Banking sector remains unchanged despite the reduction in OPR will put downward pressure on NIMs. This is because top-line growth rates for most local banks have been lacklustre at only mid-single-digit. Besides, we also notice that their bottom-lines are more sensitive to provisions (or credit costs). Therefore, with brighter prospect of asset quality due to lower interest rate, banks could be net beneficiaries. This is especially true for banks that have higher fixed-rate loans in their portfolios. As such, we prefer banks that have higher exposure to fixed-rate loans and may potentially benefit from lower credit cost such as MAYBANK and MBSB. Besides, deposit profiles of these two (2) banks are also favourable with (shorter tenure in FD/higher CASA ie MAYBANK at 32%/81% vs industry average 25%/69% and MBSB with FD at 72%). Moreover, valuations seem more attractive with most of the banking stocks under our coverage rated as OUTPERFORM; AFFIN (TP: RM2.60), ABMB (TP: RM4.45), AMBANK (TP: RM4.95), BIMB (TP: RM5.05), CIMB (TP: RM6.10), MAYBANK (TP: RM10.20) and MBSB (TP: RM1.15). The remainders are MARKET PERFORM as valuations are relatively stretched, in our view.

Short-term hindrance. Bank Negara Malaysia lowered the Overnight Policy Rate (OPR) yesterday to 3.00% (from 3.25%), marking its first rate decrease since July 2016. The development is negative in the short-term to Malaysian banks as Net Interest Margin (NIM) will compress following the almost immediate re-pricing downwards of floating-rate loans and lag in the re-pricing of fixed-rated deposits (FD). Negligible decrease in costs relating to demand and saving deposits (CASA) also support the NIM compression.

However, differences in the loan and deposit profiles of banks mean that some will be less affected than others. Based on latest reported results, AFFIN (33%), MBSB (60%) and MAYBANK (31%) (vs. industry average of 29%. had the highest percentage composition of fixed rated loans as at 31 December 2018. Meanwhile, ABMB and CIMB take the cake in terms of lower composition of FD/CASA.

MAYBANK and MBSB the least affected? According to our analysis (see Table 1), MBSB and MAYBANK emerge as the biggest beneficiaries with MBSB’s loans/financing 60% are being fixed-rated whilst MAYBANK comes second in terms of loans being fixed rated (31%) with 32% of its deposits in the form of CASA and 81% of its FDs maturing by June 19 (6 months tenure from Dec 18). As a result, both MBSB and MAYBANK’s net interest margins are expected to compress the least, all else being equal. However, since Dec 19, at least 5 banks have raised their Base Lending Rate (BLR) ranging from 10bps to 13bps notably; AFFIN, CIMB, HLBANK, RHBBANK (+10bps) with BIMB (+13bps) – coupled with the 25bps hike in Feb 18 following the OPR hike in Jan 18 - which will help to minimise NIM compression due to the lag in re-pricing of FDs. In this aspect, repricing of fixed rated deposits will be swifter in CIMB, HLBANK and MAYBANK as >80% of their 6-month FDs mature in June 2019, minimising the impact further for both CIMB and HLBANK.

More Mark-To-Market gains? On the upside, domestic fair value through profit & loss (FVTPL) and fair value through other comprehensive income (FVOCI)) debt instruments are poised to register a one-time mark-to-market gain to the mild rate reduction. At first glance (see Table 1), BIMB will be the most impacted as it has the highest percentage composition of FVTPL and FVOCI against its total assets, while the least affected is MBSB. 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 is usually significantly more than 30% of the total income, the unrealised gain impact may not be as material as thought.

The longer-term impact of the lower rate, though not as clear, may also lean to slightly positive. Lower lending rates may bolster credit demand and hence loans growth. Besides, the trend could lead to a higher pool of borrowers, causing demand to intensify and Average Lending Rates (ALR) to go up. Hence, any short-term compression in NIMs may potentially be lowered if not wiped out. This may cause NIMs to rise above pre-OPR hike levels once FD rates adjust to the new lower rates (three to 6 months down the road). However, historical data of ALR vs. OPR (as depicted below) does not seem to support this where rise in ARL was minimal despite OPR being lowered in 2016 as external/internal headwinds plaguing loans growth (coupled with banks selective on asset quality). However, lower interest rates will also likely result in lower credit costs as non-performing loans decrease. This, in turn, may result in banks lowering their credit scoring and approval criteria, which will give much-needed impetus to loans growth.

No change in valuations. As the long-term impact is unclear, we refrain from making any changes to our FY19E earnings; hence, our valuations are maintained for now. While forward earnings will be negative, loans growth and credit costs might shift towards a positive bias due to the impact of lower interest rates. We have OUTPERFORM call for most of the banking stocks in our universe. However, valuations seem more attractive with most of the banking stocks under our coverage rated as OUTPERFORM; AFFIN (TP: RM2.60), ABMB (TP: RM4.45), AMBANK (TP: RM4.95), BIMB (TP: RM5.05), CIMB (TP: RM6.10), MAYBANK (TP: RM10.20) and MBSB (TP: RM1.15). The remainders are MARKET PERFORM as valuations are relatively stretched, in our view.

Source: Kenanga Research - 8 May 2019