BNM raise s OPR by another 25bps and this did not come as a surprise. Overall, banks are still net beneficiaries as NIM is expected to widen. Every 25bps OPR hike would boost sector NIM by 5-6bps and profit forecast by 4-5% (big gainers: Alliance, BIMB; small gainers: Affin, Public). Forecasts were unchanged and we are still positive on banks. Maintain OVERWEIGHT; BUY calls include: Maybank, RHB, BIMB, Affin.

NEWSBREAK

At the MPC meeting yesterday, BNM raised the OPR by 25bps to 2.25%; this was in line with our economics team’s expectations. For the remainder 2H22, we see another 25bps hike, bringing OPR to 2.50%.

HLIB’s VIEW

Impact on banks. Banks typically gain from a rising interest rate environment. From our sensitivity analysis, we estimated that every 25bps OPR hike would expand sector net interest margin (NIM) by 5-6bps which in turn, bump up earnings forecast by 4-5% (on a full year basis, without taking into account of potential market-to-market losses and higher defaults); Alliance and BIMB would gain most while Affin and Public Bank are poise to benefit the least. Here we assumed a symmetrical 25bps rate increase for both variable loans and non-CASA deposits while all other factors were held constant. Besides, we used group figures in our analysis; thus, for banks with sizeable overseas business (like Maybank and CIMB), actual gains are likely to be lower vs calculations.

How did banks react to previous OPR hike? Studying the trends of May-22’s OPR hike, the weighted base rate (BR) and lending rate (BLR) increased 25bps and 24bps respectively, in line with the official 25bps uptick. While for deposit, rates climbed by a similar quantum where 1-12mth FD jumped 21-24bps but savings only ticked up 6bps. Looking further back at Jan-18’s OPR hike, we saw NIM rose 4bps sequentially and contracted in the following 2 quarters (due to upward re-pricing in deposits).

Impact from CASA substitution to FD. We note sector CASA ratio is high at 32% vs pre-pandemic level of 26%. We estimated every 1% CASA ratio reversal would drag sector NIM by 1-2bps and profit by 1%, assuming an FD-CASA spread differential of 150bps. From our compilation, Alliance and AMMB saw their CASA ratio shot up the most (by 11-12ppt) relative to peers (by 8ppt) from 4Q19 to 1Q22 while Affin and RHB experienced the least built-up (by 2-3ppt). However, if a full CASA reversion scenario plays out, it will only neutralize gains from 50bps OPR increase. So far, BNM has only raised OPR by 50bps vs a total 125bps reduction during the Covid-19 pandemic era, suggesting room for more rate hikes and a series of this, aids consecutive widening in NIM. Overall, banks are still net beneficiaries.

Forecast. Unchanged as the OPR increase was within expectations.

Keep OVERWEIGHT. All considered, we view positively the banking sector and opine that the risk-reward profile is skewed to the upside; the combination of robust earnings growth and undemanding valuations will be impetus to drive re-rating. The strategy is to buy selectively on weakness as the market is likely to remain volatile going forward. For large-sized banks, we like Maybank (TP: RM9.70) for its strong dividend yield. For mid-sized banks, RHB (TP: RM7.00) is favoured for its high CET1 ratio and attractive price point. As for small-sized banks, BIMB (TP: RM3.30) and Affin (TP: RM2.35) are preferred; we like the former for its laggard price showing, while the latter has special dividends potential and strong financial metrics.

Source: Hong Leong Investment Bank Research - 7 Jul 2022