OPR cut negative for banks, CGS-CIMB Research says

It rates Public Bank as an Add as we believe that it is one of the most defensive among its peers against the increases in the industry’s gross impaired loan (GIL) ratio and credit cost.

KUALA LUMPUR: The cut in the Overnight Policy Rate (OPR) by 25 basis points to 2.75% would be negative for banks’ net interest margins and net profit, CGS-CIMB Equities Research says.

In its research note, it said this was because (1) the size of floating-rate loans is larger than the FDs for most banks, and (2) the timing difference between the re-pricing of loans and deposits – the rates for floating rate loans would be adjusted immediately upon the cut in lending rates but the FD rates would only be reduced upon maturity.

“We estimate that the 25bp cut in OPR would lower our FY20-21F net profit forecasts by about 2.2% (full-year impact) for Malaysian banks under our coverage, assuming a reduction of 25bp in both lending and FD rates, ” it said.

CGS-CIMB Research said based on its simulation, the rate cut would have the biggest negative impact on Alliance Bank and BIMB Holdings in view of their high floating-rate loan ratios (over total loans) of 82% and 88%, respectively.

“The 25bp OPR cut would reduce Alliance Bank’s and BIMB’s FY20-21F net profit by circa 6%, based on our estimates.

“On the other hand, the rate cut would have the least impact on Public Bank and AMMB Holdings as their floating-rate loan ratios are relatively lower at 71%-77%, ” it said.

CGS-CIMB Research said the OPR cut would have a minimal impact on banks’ loan growth and asset quality which are largely dependent on the economic environment, investment climate and the income levels of the borrowers.

“Hence, even with the OPR cut, we maintain our projected loan growth of 4-4.5% for 2020F and a gross impaired loan ratio of 1.8-1.9% at end-2020F (vs. an estimated 1.6-1.7% at end-2019F).

“The margin contraction arising from the OPR cut and the concerns over an increase in gross impaired loan ratio in 2020F are the reasons for our Neutral call on the sector.

“However, we deem banks’ dividend yield of 4.6% for 2020F to be attractive. Our picks for the sector are Public Bank and RHB Bank, ” it said.

AMMB Holdings ADD, TP RM4.60, RM3.84 close

Its Add call on AMMB is premised on its attractive valuations of 7.8x CY20F P/E and 0.6x CY20F P/BV. Also, we estimate that its profit would be one of the least impacted among its peers by the cut in OPR – a reduction of 1.3% for a 25bp cut in OPR.

Public Bank Bhd ADD, TP RM23.10, RM19.48 close

It rates Public Bank as an Add as we believe that it is one of the most defensive among its peers against the increases in the industry’s gross impaired loan (GIL) ratio and credit cost.

Its valuations are reasonable, with CY20F P/E of 13.3x and P/BV of 1.6x, below its 5-year historical average of 14.3x and 2.2x, respectively.

RHB Bank Bhd ADD, TP RM6.87, RM5.84 close

RHB Bank is an Add given the expected benefits from its transformation programme. Its valuations are also attractive at 8.6x CY20F P/E and 0.9x P/BV.

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