Riding the continuous uptrend in OPR
- On 8 Sep, BNM raised the OPR by another 25bp to 2.50%, the third 25bp hike in the benchmark policy rate in three consecutive MPC meetings.
- We estimate that every 25bp hike in OPR would increase banks’ net profits by circa 2.1% (ranging from 0.2% for Affin Bank to 7.6% for Bank Islam).
- We reiterate our Overweight call on banks as we expect banks’ net interest margins to expand in 2H22F and 2023F amid the OPR upcycle.
Another 25bp OPR hike makes a total increase of 75bp YTD
At the monetary policy committee (MPC) meeting on 8 Sep 22, Bank Negara Malaysia (BNM) raised the benchmark overnight policy rate (OPR) by another 25bp to 2.50%, in line with our economist’s expectation. This was the third 25bp OPR hike in as many MPC meetings (after the hikes on 11 May and 6 Jul 22). Our economist projects a total OPR hike of 75bp in 2022F (which means no hike in the Nov 22 MPC meeting) and 50bp in 2023F.
Upside to our earnings forecasts for banks
We expect the OPR hikes to benefit banks as their floating-rate loans are larger than their fixed deposits (both of which are repriced upwards during OPR hikes). We have factored in a total hike of 75bp in 2022F in our earnings forecasts for banks. If we were to factor in the OPR hike in 2023F, every additional 25bp hike would increase our net profit forecasts for banks by an estimated 2.1% (on a full-year basis; for FY24F for HLB, AMMB and Alliance Bank, and FY23F for the rest). However, the positive impact from OPR hike could be partly diluted by higher cost of funds from a pick-up in the deposit competition. Our analysis shows the OPR hike having the largest positive impact on Bank Islam (7.6% increase in FY23F net profit for every 25bp hike) as its floating-rate loan ratio of 91% in FY23F is the sector’s highest. Conversely, the impact would be smallest on Affin Bank’s FY23F net profit (0.2% increase for every 25bp hike) as its FY23F floating-rate loan ratio of 74.1% is one of the lowest in the sector.
Expecting strong loan growth despite OPR hikes
In theory, the OPR hikes would have a negative impact on banks’ loan growth as this will increase monthly loan repayments for borrowers, and consequently reduce the affordability for loans. However, we think that our loan growth projection of 5-6% for 2022F (one of the strongest organic growth rates since 2016) is achievable despite the 75bp hike in OPR expected by our economist for 2022F. Our view is premised on the strong loan growth of 5.9% yoy at end-Jul 22 and swift expansion of close to 80% yoy for both loan applications and approvals in Jul 22.
Our top pick is RHB Bank
We reiterate our Overweight call on banks as key beneficiaries of the OPR hikes. Potential re-rating catalysts would be (1) an expansion in net interest margin amid the OPR upcycle, (2) 2022F loan growth being among the strongest in recent years, and (3) decline in loan loss provisioning in 2022F. RHB Bank is our top pick for the sector.