M’sian banks can expect earnings boost in the absence of OPR cuts

THE recent Bank Negara Malaysia’s (BNM) stance to maintain the overnight policy rate (OPR) at 1.75% is poised to have net profit upside on banking stocks.

According to CGS-CIMB Research, a reversal of OPR cut would increase its FY2021F net profit forecasts by about 1.7%.

In the research house’s assessment, Alliance Bank Malaysia Bhd would see the highest increase at 7.5% for its FY2022F net profit given (i) the bank is regarded as one of the most sensitive to the changes in interest rates that arise from its high floating-rate loan ratio of 82% and high low-cost deposit (current account savings account [CASA]) ratio of 37.9% in FY2022F.

“(Moreover), we expect its FY2022F net profit to be weak due to elevated credit costs as reflected by its low FY2022F ROE (return on equity) of only 6.6%,” projected analyst Winson Ng in a banking sector review following BNM’s latest interest rate stance.

On the other hand, CGS-CIMB Research expects Public Bank Bhd to see the smallest upside from the unchanged OPR rate at only 0.9% for its FY2021F net profit.

“This is because its non-CASA ratio is high at our projected 74.6% in FY2021F while 7% of its loans are in foreign markets which are not affected by the OPR movements in Malaysia,” justified Ng.

More broadly, the research house expects banks’ net interest margins (NIMs) to expand marginally (2-3 basis points [bps]) in FY2021F if there is no OPR cut during 2021F.

“Banks’ FY2020 NIMs were also hurt by modification losses for fixed-rate loans but we do not expect any material modification loss for banks in FY2021F,” opined Ng.

All-in, an absence of OPR cuts in 2021F would support CGS-CIMB Research’s expectation of a revival in net interest income growth in FY2021F.

“This, coupled with the projected drop in loan loss provisioning, should enable banks to witness a recovery in net profit growth in FY2021F,” reckoned the research house.

“We see this as a potential re-rating catalyst for our Overweight call on Malaysian banks. Our picks for the sector are Public Bank, Hong Leong Bank Bhd and RHB Bank Bhd.”

Commenting on the unchanged OPR, PublicInvest Research cautioned that downside risks may come from hiccups in COVID-19 vaccination drive which may be affected by a low take-up rate or shortages in vaccine supply.

“A less-than-effective implementation of COVID-19 vaccination drive may delay recovery in the services sector amid the need to, among others, hold back from the opening of our borders and allow inter-state travel,” argued economist Dr Rosnani Rasul.

“The impending start of US-China trade talks is also a going concern especially when the US is expected to touch on a wide-array of sensitive issues like market access restriction for US companies (eg cloud computing) and alleged forced labour in China which could potentially push the negotiation period to be a lengthy and uncomfortable one.” – March 5, 2021

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