BNM MPC’s meeting on 3 May 2023 closed with a 25 bps OPR hike (to 3.00%), which was a surprise to us. While banks observe an indicative six months watchlist on troubled accounts after every change in the OPR, we had anticipated that BNM would allow more time in the event that inflationary pains may take longer than expected to be reflected in cash flows. That said, the rise in interest rates could temporarily halt interest margin pressures from the increasingly competitive deposits space, hence it is positive to the sector. The translated impact from this OPR increase appears to still be within previous corporate guidances of 1−3 bps net interest margin expansion with a marginal revision to earnings (<2% at most). There are no changes to our calls post-rate hike with no further rate hikes anticipated for the rest of the year.

We continue to maintain our OVERWEIGHT call on the sector with top picks being names with highly conservative fundamentals. In the wake of global banking meltdowns, investors may demand stronger safety nets from banks to consider them investible. With that, we recommend: (i) PBBANK (OP; TP: RM4.90) for its leading GIL ratio supported by highly collateralised books, and (ii) RHBBANK (OP; TP: RM7.10) for its leading CET-1 ratios in addition to now substantially more attractive dividend prospects (7%−8% yield).

Margins bump still welcomed. Similar to preceding 25 bps OPR hikes, the annualised impact from the recent move also appears to be a 1−3 bps increment to corporate net interest margins. This in turn translates to earnings upgrades of up to 2%. We note that ABMB (OP; TP: RM4.40); AMBANK (OP; TP: RM5.00) and HLBANK (OP; TP: RM23.35) are the least materially affected in their respective FY23F earnings, owing to their odd financial year-end.

Maintain OVERWEIGHT on the banking sector. BNM had credited stronger economic deliveries fuelled by improving unemployment levels, supportive business climates and commencement of large infrastructure projects as the basis of its surprise hike as inflation rates require further suppression with monetary tightening being sought. We gather that the need to cool the economy could be paired with wider macro factors as underlying recessionary concerns may still be present. On the flipside, we still anticipate strong resilience from the banks as their sound capital and provisions management offers comfort in the event of an unexpected economic fallout (though we do not believe this could be as significant as Covid-19’s lockdown).

For 2QCY23, we promote PBBANK as it is the leading bank in terms gross impaired loans reading at 0.4% (vs peer average: 1.5%) backed by a highly collateralised loan book thanks to a substantial mortgage portion (41% of total books). Meanwhile, its recent shares sell-down owing to uncertainties of its shareholder and ownership structure may see an inversion when clarity on the matter unfolds. We also like RHBBANK as we believe the relevancy of strong capital safety will be in the limelight once more. RHBBANK continues to lead with its CET-1 buffers (17% vs. peers’ average of 14%). RHBBANK’s dividend prospect is becoming more promising with targeted payouts of c.55% looking to generate yields of 7%−8%. Also, developments on its upcoming digital bank with Boost could support interest in the stock.Y23F earnings, owing to their odd financial year-end.

Source: Kenanga Research - 5 May 2023