KUALA LUMPUR: CGS-CIMB Equities Research is retaining its overweight on the banks as a pause in overnight policy rate (OPR) cuts supports its positive view of banks’ margins and earnings in 2021F.
It said on Wednesday that the Bank Negara monetary policy committee’s (MPC) decision to keep the OPR at 1.75% was a positive surprise for banks as it had factored in a 25bp cut.
“The absence of a margin depleting OPR cut is positive for banks. Our economist expects the OPR to be maintained at 1.75% until end-2021, signifying no further OPR cuts in 2021F, ” it said.
To recap, CGS-CIMB Research had factored in total OPR cuts of 150bp (including a 25bp cut in November) in its earnings forecasts for most banks.
“Given that yesterday’s OPR cut did not materialise, reversing out the 25bp cut from our forecasts would raise our projected FY21F net profits for banks by 1%-2%.
“The biggest potential increases would be c.8% for Alliance Bank and BIMB, as we see both these banks as being the most sensitive to OPR cuts.
“Conversely, we estimate that reversing out the 25bp OPR cut would reduce Affin’s FY21F net profit by 2.8% as it is the only bank that would have benefitted from an OPR cut, ” it said.
The research house said the likely pause in OPR cuts would further support its expectation of a revival in net interest income growth in 2021F.
It projected the net interest income of Malaysian banks under its coverage to expand by 3.8% in 2021F, compared to an expected 6.7% drop in 2020F. This is because OPR was reduced by 125bp in 2020F, while it is not expecting any cuts in 2021F.
CGS-CIMB Research said it expected banks’ net interest margins to be stable (or slightly lower) in 2021F, compared to the expected 10-12bp contraction in 2020F.
It said the expected revival of banks’ net interest income growth and projected 23.4% drop in loan loss provisioning in 2021F underpinned its expected recovery in banks’ net profit growth to 14.8% in 2021F, which is a potential re-rating catalyst for its Overweight call for banks.
“We also deem banks’ valuations as attractive as its CY21F P/E of 10.1x is below the five-year historical average of 12.7 times. Our picks for the sector are Public Bank, Hong Leong Bank, RHB Bank and AMMB, ” it said.