Most bank stocks up this morning after OPR kept at 1.75%; analysts maintain positive, overweight stances on sector

TheEdge Thu, Jan 21, 2021 10:44am - 1 month ago

KUALA LUMPUR (Jan 21): Most banks opened up higher this morning after Bank Negara Malaysia’s (BNM) decision to keep the overnight policy rate (OPR) at 1.75% yesterday. Seven banks were in the green, while three were in the red.

Malayan Banking Bhd opened 0.49% or 4 sen higher at RM8.13, Public Bank Bhd increased 1.31% or 28 sen to RM21.60, CIMB Group Holdings Bhd was up 0.74% or 3 sen to RM4.07, while RHB Bank Bhd gained 0.19% or 1 sen to RM5.30.

Hong Leong Bank Bhd increased 0.11% or 2 sen to RM17.62, AMMB Holdings Bhd was higher by 1.23% or 4 sen to RM3.30, and Affin Bank Bhd gained 0.59% or 1 sen to RM1.71.

The three banks in the red were marginally lower this morning. Alliance Bank Bhd was down 0.37% or 1 sen this morning to RM2.69 while Malaysia Building Society Bhd is lower at 0.79% or 0.5sen to 62.5 sen and BIMB Holdings Bhd fell 0.98% or 0.4 sen to RM4.06.

CGS CIMB Research is positive on Bank Negara’s move to maintain the OPR yesterday as a cut is detrimental to banks’ net interest margins (NIM) and net profits.

In a note yesterday, it maintained its Overweight stance on banks “due to expectations of a better outlook for NIM and lower loan loss provisioning in 2021F”.

“We maintain our net profit growth forecast of 19% for 2021F, underpinned by a projected 30.2% drop in 2021F loan loss provisioning (vs. a spike of 112.3% in 2020F), and turnaround in net interest income growth from a decline of 5.4% in 2020F to an expansion of 4.7% in 2021F,” it noted.

MIDF Research noted today that no cuts to the OPR will provide a “reprieve for banks’ net interest margin (NIM) this year”.

“We expect that any NIM compression will be benign this year as compared to the pressure from the 125bp cuts last year and the modification loss following from the loan moratorium. Nevertheless, we opine should there have been any further OPR cut this year; the impact to banks’ NIM will likely be muted minimal deposit competition,” it added.

Nevertheless, CGS CIMB cautioned that “the risk of an OPR cut persists”.

“Our economist sees the possibility for an OPR cut of 25bp in 1H21 should the MCO 2.0 continue for a protracted period. We estimate that a 25bp cut in OPR would lower our projected FY21F net profit for banks by about 2.2% (on a full-year basis). Hence, a 25bp OPR cut would lower our projected net profit growth for banks in 2021F from 19% currently to 17.2%, ceteris paribus (assuming an OPR cut in Mar 21),” it said. The next MPC meeting is set for 4 Mar 21.

“Our economist’s change in view to now expecting a 25bp OPR cut in 2021F (from no cut previously) is negative for banks. However, this is much narrower than the 125bps cut in 2020, signifying a better NIM outlook in 2021. The expected rebound in net interest income and lower loan loss provisioning support our expectation of a recovery in net profit growth in 2021F, acting as a re-rating catalyst for our Overweight call for the sector,” it added.

CGS CIMB’s picks for the sector are Public Bank (Add, TP: RM25), Hong Leong Bank (Add, TP: RM18.70), RHB Bank (Add, TP: RM6) and AMMB (Add, TP: RM3.97).

Based on CGS CIMB’s analysis, it said the negative impact from a 25bp OPR cut would be the greatest on BIMB and Alliance Bank, at an estimated impact of 7-8% of their FY21F net profits.

“For BIMB, this is because it has the highest floating-rate loan ratio (over total loan) of 88.2% projected by us in FY21F vs. an average of 77.3% for banks under our coverage. Alliance Bank’s floating-rate loan ratio is also high at our forecasted 82% in FY21F,” it noted.

It pointed out that the impact of a 25bp OPR cut would be smallest at 1.2% for Public Bank’s FY21F net profit, due to its high non-CASA ratio of 74.6% in FY21F (vs. sector average of 72.4%).

Looking ahead for the sector, MIDF Research remains positive “premised on the recovery of the economy, made more certain with the availability of the vaccine in 2HCY21”.

“We expect credit cost to start normalising while income will stage a rebound especially as our economics team opine of a potential rate hike in the final quarter of the year. Therefore, we expect earnings will improve in CY21. Hence, we maintain our positive recommendation for the sector,” it said.  

“Nevertheless, we recognize that there is short term pressure that banks will have overcome. Primarily, the potential stress on asset quality, but we opine that banks in general will be able to weather it. This is especially the case for banks with large loan loss reserves and/or has been resilient during the current challenging environment,” it added.

MIDF Research’s top picks for the sector are Hong Leong Bank (BUY, TP: RM19.70) and RHB Bank (BUY, TP: RM5.90).

Aside from keeping OPR steady yesterday, Bank Negara also announced the extension of the flexibility for banking institutions to use Malaysian Government Securities (MGS) and Malaysian Government Investment Issues (MGII) to meet the statutory reserve requirement (SRR) compliance until Dec 31, 2022.

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