BNM has raised the OPR by another 25 bps for the third time this year, bringingitto 2.50% as of yesterday.This is well expected, as inflationary pressures persist globally, albeit to a lesser extent locally. We anticipate BNM would introduce another 25 bps hike during its November 2022 MPC meeting, with the possibility of another in 1QCY23 to close at 3.00%. The impact to corporate earningsiswell guidedwith higher interest rates offloading competitive pressuresonthe deposits front. This translatesto an increasein NIMsof 2-4 bps on an annualised basis(except MBSB which is expected tosee compression from its unfavourably high fixed-rate loans mix). Allour stockcalls within the sector are unchanged, save for a few nudges to TP. Maintain OVERWEIGHT on the sector, with greater favour towards prominent dividend yielders for buffers against recessionary concerns. Our highlights remain to be MAYBANK (OP; TP: RM11.05) and AFFIN (OP; TP:RM2.45) for now.

More interest repricing to carry earnings. The guided impact from the OPR hike remains unchanged from corporates in spite of having undergone two 25 bps hikes previously. Incorporating the new rate to our assumptions, the impact to the FYE Dec counters are expectedly more muted as the new 2.50% level only implicates the last four months of the year. EPS improvements on an annualised basis ranges from 1-2% whereas MBSB is expected to see further earnings erosion owing to their high proportion of fixed-rate financing relative to deposits.

Post update, all our stock calls remain unchanged, although there were minor upticks in HLBANK (OP; TP: RM23.35) and MBSB (UP; TP: RM0.505)’s target prices. (refer to the overleaf)

Maintain OVERWEIGHT on the Banking Sector. We continue to overweight the banking sector which will be resilient particularly in an interest rate up-cycle environment, as economic activity remains supportive. In the near term, the banks are expected to demonstrate earnings bumps from the normalisation of credit cost post-Covid provisions and eventual writebacks from overlays. Further, the lapse of prosperity tax in the coming year could provide a meaningful bump-up to earnings and possibly shareholder returns. On the flipside, market sentiment is still showing signs of tepidness as recessionary-pulled concerns still arise from global macros, with recurring Covid lockdowns in China not inspiring confidence. With that, we keep our recommendation to side with banks that could provide solid dividend cushions in the near to medium-term. For the larger cap banks, our Top Picks are MAYBANK (OP; TP: RM11.05) which we highlight for stellar dividend returns (7-8%) paired to its commendable asset quality readings (GIL: <1.9%, below listed peers’ average of 2.0%) in spite of being the leader in loans and deposits. For the smaller cap banks, we believe AFFIN (OP; TP: RM2.45) presents opportunities with the return of earnings growth prospects, thanks to its AIM22 initiatives. Prospective special dividends from the disposal of AHAM could further boost its decent yield of 5-6%.

Source: Kenanga Research - 9 Sept 2022