• Maintain OVERWEIGHT. Preferred Picks: Hong Leong Bank (HL Bank), AMMB Holdings and Malayan Banking. Yesterday afternoon, Bank Negara Malaysia (BNM) raised the overnight policy rate (OPR) by 25bps – in line with economists’ expectations. The path to monetary policy normalisation would be moderately positive for banks’ NIMs, providing cushion for any downside risks from rising macroeconomic challenges. Sector earnings growth at 5%, although unexciting, is decent as are dividend yields. We continue to prefer defensive names to weather market volatility.

• BNM raises rate for second time in 2022. BNM’s Monetary Policy Committee (MPC) at its meeting on 6 Jul decided to increase the OPR by 25bps to 2.25%. On 11 May 2022, the MPC raised the policy rate by 25bps from the record low of 1.75% – the first increase since Jan 2018. RHB economists believe the balance of risks is skewed towards a third hike of 25bps to 2.50% at the Sep 2022 MPC.

• Will see full transmission of OPR hike. Like the May 2022 hike, we expect banks to raise base lending rates and base rates by the full 25bps. Deposit rates, namely for fixed deposits, should also rise by the same quantum, although the full transmission to higher funding costs will only be evident after deposits are fully re-priced in 3-4 months.

• Smaller banks to be biggest beneficiaries. Bank Islam Malaysia (BIMB), Affin Bank and Alliance Bank Malaysia (ABMB) would see the biggest NIM expansion and earnings boost. Based on guidance that a 12-month impact from a 25bps OPR hike would lift NIMs by 4-5bps for Affin and ABMB, and 5-6bps for BIMB, our calculations point to net profit improvement of c.3% for Affin and ABMB, and c.5% for BIMB. For the large banks, NIMs expansion of 2-4bps would translate into earnings uplift of 1-2% (See Figure 1).

• Earnings forecasts maintained. Based on our estimates, the latest rate hike together with the first 25bps increase in May would raise sector FY22F net profit by 1.8%. A third rate hike of 25bps in September would improve the cumulative earnings uplift to 2.2%. We will incorporate the July and third OPR hike into our forecasts when we review the coming 2Q22 results. We believe there are risks the upward revision in net interest income could be somewhat offset by potentially lower fee income, given the volatility in financial markets. Currently, we are projecting a 5% YoY growth in sector earnings for FY22F.

Source: RHB Research - 7 Jul 2022