BNM had, in yesterday’s MPC meeting, decided to cut the OPR by 25bps. The decision, which was within in-house expectations, brings the policy rate to a historical low of 1.75%. Among the banks, ABMB is more sensitive to a change in the policy rate. Moving forward, our economist sees a dovish Central Bank and is now pencilling in another 25bps OPR cut at the Sep MPC meeting. While near-term negative for margins, the aggressive policy rate cuts may help to temper the rise in GIL ahead. At this stage, banks have little visibility as to how severe the pandemic has had on asset quality as the loan moratorium and various lending programmes to SMEs have kicked the can down the road into 2021. For now, we are keeping our NEUTRAL sector call with RHB as our top pick.

BNM decided at yesterday’s Monetary Policy Committee (MPC) meeting to lower the OPR to a historical low of 1.75% from 2.0%. The move was in line with our economist’s expectation, and follows on the back of earlier OPR reductions of 25bps each in Jan 2020 and Mar 2020, as well as the recent 50bps cut in May, i.e. BNM has cut the OPR in each of its MPC meetings thus far this year. Our economist thinks that the latest move could be pre-emptive in nature to support the pace and strength of the recovery ahead. As per BNM’s statement, “the reduction in the OPR provides additional policy stimulus to accelerate the pace of the economic recovery”.

Looking ahead, our economist is now pencilling in another 25bps policy rate cut to 1.5%, which is expected to take place in the next MPC meeting in Sep. Our economist sees the above statement by BNM as a sign that the central bank will likely remain dovish and highlights that a rate cut will also serve as additional relief to debtors such as the SMEs and lower income households, especially once the loan moratorium ends in Sep.

Yesterday’s policy rate decision together with our revised expectation of another cut is negative for banks’ margins. Recall that during the recent 1QCY20 results briefings, the banks had broadly revised their NIM guidance to a larger compression of 10- 15bps from 5-10bps, citing sharper than expected rate cuts. The guidance generally does not take into account further rate cuts that may occur in 2H 2020. Thus, the latest development is likely to lead to a downward revision by the banks on NIM expectations ahead, where every 25bps reduction in the OPR impacts NIM by c. 3bps. We set out below the estimated impact of yesterday’s OPR decision on banks’ NIMs and profitability, with the biggest impact on ABMB (MP; TP: RM2.00).

We do not expect the market to react too negatively to yesterday’s OPR decision nor expectations of yet another rate cut. Banks’ NIMs have already been adversely hit by the earlier 100bps cut and the upcoming impact from Day One Modification losses (which we have partly included in our forecasts) will have a further lumpy impact on margins. In addition, we believe investors are largely looking ahead to 2021. In mitigation, some banks had recently guided that the impact of Day One Modification losses would not be as severe as initially estimated. In addition, we believe we are now closer to the end of the rate cut cycle and experience suggests that this would be positive for share price performance.

Maintain NEUTRAL sector call. No change to our earnings forecasts for now. In our view, banks earnings ahead remain uncertain and volatile while the path to recovery is unlikely to be clear cut. Early signs from the banking statistics suggest that pre-emptive loan provisioning may see an acceleration in 2Q. In mitigation, the re-opening of the economy and significant cuts to policy rate have helped clear some overhang for the sector. Also, Day One Modification losses may not be as bad as feared.

RHB (OP, TP: RM6.00) is our top sector pick on attractive valuations and solid capital ratios to absorb higher loan allowances while maintaining a decent dividend payout. In addition, it is less impacted by Day One modification losses. We also like HLBK (OP; TP: RM17.00) as a defensive, “high quality” bank with a strong digital infrastructure that is poised to benefit from a post Covid-19 environment. AMMB’s (OP; TP: RM3.60) valuations appear undemanding and we think the stock could be an attractive catch-up play. Furthermore, AMMB had booked in aggressive pre-emptive loan provisioning during its 4QFY20 results, which could help keep further allowances ahead in check while recent guidance on Day One Modification losses seem much lower than initial estimates. We rate Affin (UP; TP: RM1.45) and CIMB (UP; TP: RM3.45) as UNDERPERFORM mainly due to asset quality concerns and CIMB’s weaker capital position if asset quality pans out worse than expected. Near-term key upside risk to our sector call is a liquidity fuelled rally and/or rotational play into value/cyclicals. Key near-term downside risk is if an economic lockdown is required should a Covid-19 second wave emerge

Source: Kenanga Research - 8 Jul 2020