Maybank IB Research estimate that every 25 basis point hike in the OPR would raise earnings for Malaysian banks by 1 to 3 per cent. — Bernama photo
KUCHING (May 12): The 25 basis point overnight policy rate (OPR) hike is positive for banks’ margins and will raise earnings by about 1 to 3 per cent.
“Generally, higher interest rates are positive for banks’ margins. Nevertheless, a more immediate concern would be the prospect of marked-to-market losses (MTM) from the rise in bond yields,” commented the team at Maybank Investment Bank Bhd (Maybank IB Research).
“The 10-year MGS yield, for instance, currently stands at 4.35 per cent versus 3.6 per cent in December 2021.
“As such, we maintain our forecasts for now, as any improvement in margins would serve to buffer against such MTM losses.”
Maybank IB Research estimated that every 25 basis point hike in the OPR would raise earnings for Malaysian banks by 1 to 3 per cent.
Key beneficiaries, in its view, would be Alliance Bank Malaysia Bhd, RHB Bank Bhd, AMMB Holdings Bhd and Public Bank Bhd, which could see an uplift in earnings of about 2.6 per cent each, from such a move.
“At the lower end of the spectrum would be Hong Leong Bank Bhd, we believe, with an estimated one per cent enhancement to earnings.”
As Kenanga Investment Bank Bhd (Kenanga Research) reflected a higher OPR of 2 per cent in model assumptions commencing May 2022, it expects this to translate to earnings revisions of up to 3 per cent.
“While we keep other key assumptions unchanged for now, we had anticipated that there could be some erosion in net interest margins (NIMs) in 2023 as competition for deposits may continue to be intense.
“Still, the higher OPR would support the margin gains seen since July 2020’s 1.75 per cent OPR levels where deposit products had been progressively repriced efficiently than financing ones,” it said.
“Overall, this led to a marginal increase in several of our target prices with our stock calls remaining intact.
“Not forgetting, 2022 would bear the brunt of the one-off prosperity tax in addition to sequential decline in investment and trading gains as market sentiment is predicted to be comparatively softer.”
Kenanga Research believes investors would react positively to the higher OPR, reaffirmed by the improved earnings prospects that could be seen with further rate hikes to come.
The research house had reflected higher valuations in its earlier report, believing opportunities for capital gains were still present.
“Selectively, we had favoured stocks with additional value propositions to be our Top Picks for this 2Q22 period, namely RHB Bank and Hong Leong Bank. RHB Bank’s successful bid with Boost Holdings for a digital banking licence could stir greater interest when details of its strategic plans are made available.
“Meanwhile, we had thought that RHB Bank would be the quickest beneficiary of OPR hikes given its higher floating rate financing mix. Hong Leong Bank could be seen as a contrarian pick.
“While it is expected to benefit from a greater demand for loans like its peers, its better-than-pre-pandemic grossed impaired loans ratios indicates high asset quality safety in the event of any unforeseen worsening of Covid-19 or global macros that may affect overall asset quality prospects.”