Yesterday, BNM raised the OPR by 25bps to 2.00%. This came sooner than anticipated, against our in house expectations of (two) rate hikes only in2HCY22. The tightening is likely to impede inflationary consequences from recent volatile commodity prices and supply chain disruptions. That said, this is undoubtedly a boon for financial institutions as they will be able to price in higher rates and lift earnings. We do not believe the hike would be disruptive to the local economy as of yet as industry asset quality still appears manageable post moratorium. Corporates have guided a 2-4 bps increase in NIMs, which appears true following our model updates. While this translates to earnings increase of <5%, we believe the move by BNM will only strengthen sentiment as it could be indicative of further hikes to come, contemplative of the US Fed’s recently hawkish stance. We maintain our OVERWEIGHT call on the sector with our favourites being: (i) RHBBANK (OP; TP: RM6.95) for its high floating rate mix and recent digital banking win; and (ii) HLBANK (OP; TP: RM22.85) as a safe haven pick for investors fearful of unfavourable developments in macros and potential worsening in asset quality.

Earnings bump for the banks. As we reflect a higher OPR of 2.00% in our model assumptions commencing May 2022, we expect this to translate to earnings revisions of up to 3%. While we keep other key assumptions unchanged for now, we had anticipated that there could be some erosion in NIMs in CY23 as competition for deposits may continue to be intense. Still, the higher OPR would support the margin gains seen since July 2020’s 1.75% OPR levels where deposit products had been progressively repriced efficiently than financing ones. Overall, this led to a marginal increase in several of our target prices with our stock calls remaining intact. Not forgetting, CY22 would bear the brunt of the one-off prosperity tax in addition to sequential decline in investment and trading gains as market sentiment is predicted to be comparatively softer.

Maintain OVERWEIGHT on the Banking Sector. We believe investors would react positively to the higher OPR, reaffirmed by the improved earnings prospects that could be seen with further rate hikes to come. We had reflected higher valuations in our April 2022 –Banking Strategy report and we believe opportunities for capital gains are still present. Selectively, we had favoured stocks with additional value propositions to be our Top Picks for this 2QCY22 period, namely: (i) RHBBANK (OP; TP: RM6.95); and (ii) HLBANK (OP; TP: RM22.85). RHBBANK’s successful bid with Boost Holdings for a digital banking licence could stir greater interest when details of its strategic plans are made available. Meanwhile, we had thought that RHBBANK would be the quickest beneficiary of OPR hikes given its higher floating rate financing mix. HLBANKcould be seen as a contrarian pick. While it is expected to benefit from a greater demand for loans like its peers, its better-than-pre-pandemic GIL ratios indicates high asset quality safety in the event of any unforeseen worsening of Covid-19 or global macros that may affect overall asset quality prospects.

Source: Kenanga Research - 12 May 2022