No OPR cut good for banks, CGS-CIMB Research says

  • Analyst Reports
  • Friday, 11 Sep 2020

CGS-CIMB Research says: "Our picks for the sector are Public Bank, RHB Bank and AMMB."

KUALA LUMPUR: Bank Negara Malaysia's decision to retain the overnight policy rate (OPR) at 1.75% during its monetary policy committee (MPC) meeting on Thursday is positive for banks, CGS-CIMB Equities Research says.

In its research note issued on Friday, it estimates that every 25bp OPR cut would lower banks’ FY21F net profits by circa 2%.

“Our economist now expects an end-2020F OPR of 1.75% (vs. 1.5% previously), which implies no more OPR cuts for the rest of the year, ” it said.

CGS-CIMB Research said it had earlier factored in OPR cuts of 150bp (including a cut of 25bp on Thursday) in its earnings forecasts for banks but the cut did not materialise.

“As such, we are likely to revise our current assumptions of a 150bp OPR cut to 125bp OPR cut (in line with the revised house view).

“On a preliminary basis, we estimate this could potentially lead to 1%-2% upgrades in our net profit forecasts for banks. We think that the 125bp OPR cuts this year would have had a negative impact of circa 10% on banks’ FY20F net profit (on a full year basis), ” it said.

CGS-CIMB Research saud its analysis revealed that the net profits of Alliance Bank and BIMB are the most sensitive to OPR movement.

It estimates that for very +/- 25bp change in OPR, Alliance’s and BIMB’s net profit would be +/-8% in FY21F. The only bank, based on our analysis, that would have the opposite impact on net profit compared to the OPR movement would be Affin Bank.

“We estimate that a 25bp cut in OPR would enhance Affin’s FY21F net profit by 2.8% and vice versa, ” it said.

The research house said while the pause in OPR cuts is a positive surprise for Malaysian banks, they nevertheless will still have to grapple with the negative impact of the 125bp cuts so far this year, which could even be felt in 2021F.

However, the potential pick-up in loan growth in 2H20F should help to partly offset the negative impact from OPR cuts.

“As such, we retain our Neutral call on banks. We also deem banks’ valuations to be reasonable with CY21F P/E of 10.7 times, vs. the five-year historical average of 12.5 times. Our picks for the sector are Public Bank, RHB Bank and AMMB, ” it said.

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