BNM announced a 25bps reduction on the overnight policy rate (OPR) to 3.00% from 3.25% which came in earlier than expected. For now, we expect the OPR to be maintained at 3.00% for the rest of 2019. The OPR reduction of 25bps came in earlier than July 2019 that was expected by our economist. Domestically, 1Q19 GDP growth is expected to moderate due to the weaker export numbers. BNM sees a slowdown in global demand and growth of key trading partners as challenges to Malaysia’s economic activity ahead.
No change to our base case GDP growth projection of 4.5% for 2019. Despite the 25bps rate cut, we continue to project a base case GDP growth of 4.5% for this year. This will be supported by domestic activities, underpinned by a sustained expansion in the private sector activity. BNM has kept its baseline GDP projection for Malaysia unchanged at 4.3–4.8% for 2019. Nevertheless, the central bank hinted that there are downside risks to this projection. This is due to uncertainties in the global and domestic environment, unresolved trade tensions and weaknesses in commodity-related sectors.
Minimal impact on banks’ earnings from the 25bps OPR cut with banks’ quarterly NIMs expected to normalize after 3 to 6 months from the repricing of deposits. Exhibit 2 shows that the 25bps reduction in the benchmark rate will have minimal impact on banks’ earnings of 0.5–3.0% while NIMs will be impacted by 1–4bps. The impact of any OPR change will be short term (estimated 1 to 2 quarters) as the repricing of deposits will eventually catch up with the changes in lending rates. In any case, valuations of all banks will soon be rolled over to FY20 after the completion of the upcoming results review in May 2019. Hence, the rate cut will not significantly impact valuations of banks negatively. We would be more concerned on consecutive rate cuts of more than 50bps in 6 months which is a highly unlikely scenario.
Banks with recent hikes to base rate (BR)/base financing rate (BFR) are likely to be able to partially mitigate the impact of the rate cut. Of late, several banks have raised their base rate/base financing rate upwards to offset the pressure from the rise in their funding cost. Both RHB Bank and Hong Leong Bank raised their BRs by 10bps on 5 Apr 2019 and Jan 2019 respectively while CIMB and BIMB increased their rates by 10bps and 13bps in Dec and Nov 2018 respectively. The rise in base rates are expected to be able to partially mitigate the impact of the interest rate reduction.
Loan growth projection for the banking sector maintained at 4.0–5.0% for 2019. Our loan growth projection is maintained at 4.0–5.0% for 2019 which translates into a loan/GDP multiplier of circa 1.0x.
No change to our rating for banks. The OPR cut will not change our ratings on banks but it will reduce our fair values for Maybank, Public Bank, RHB Bank, Alliance Bank and BIMB Holdings slightly as shown in Exhibit 2.
We maintain OVERWEIGHT on the banking sector. Our top picks continue to be Maybank (FV: RM10.60/share), RHB Bank (FV: RM6.10/share) and BIMB Holdings (FV: RM4.90/share). We continue to see valuations of banks as compelling with the sector trading at average P/BV of 1.2x for FY19 and 1.1x for FY20. These valuations are close to the average P/BV ratios of Thailand and Singapore’s banking sector and are less expensive than banks in Indonesia. Dividend yields of local banks, particularly Maybank and CIMB, are also turning attractive compared with the regional peers.
Source: AmInvest Research - 8 May 2019