CGS-CIMB expects another 25bps OPR before year-end

We expect the OPR hike to be positive for banks as their total floating-rate loans are larger than their total fixed deposits, says analyst

by ANIS HAZIM / graphic by TMR

CGS-CIMB Securities Sdn Bhd (CGS-CIMB Research) is expecting another 25 basis points (bps) hike in the Overnight Policy Rate (OPR) before the end of 2022, which will lift the OPR by 75bps in 2022 to 2.5% by end of this year.

Its analyst Winson Ng said Bank Negara Malaysia (BNM)’s second consecutive increase of OPR by 25bps to 2.25% yesterday was in line with CGS-CIMB economists’ expectations.

“We expect the OPR hike to be positive for banks as their total floating-rate loans are larger than their total fixed deposits and both of which would be repriced upward during the OPR hike,” Ng said in a note today.

According to him, CGS-CIMB has factored in a total hike of 50bps in 2022F in its earnings forecasts for banks.

“Every additional 25bps hike would increase our net profit forecasts for banks by an estimated 2.1%,” he said.

He noted that the OPR hike would have the largest positive impact on Bank Islam Malaysia Bhd’s net profit in the financial year of 2023 (FY23) with a 7.1% for every 25bps hike, as CGS-CIMB projected its floating-rate loan ratio of 91% in FY23F, which is the highest in the sector. 

“Conversely, the OPR hike would have the smallest impact on Public Bank Bhd’s FY23F net profit (1.3% for every 25bps hike) as its current and savings account ratio of 24.3% in FY23F is among the lowest in the sector,” he said.

Nevertheless, he said the interest rate hikes could be negative for banks’ loan growth and asset quality as these spell higher borrowing costs and increased monthly loan repayment. 

“However, we have factored in a deterioration for the above as reflected in our projected loan growth of 4% to 5% for 2022 versus 5% year-on-year (YoY) at end of May 2022 and an increase in gross impaired loan ratio from 1.64% at end of May 2022 to 1.8% to 2% at end of December 2022,” he added.

Thus, the research house has an ‘Overweight’ call of banking sector with the potential rerating catalyst being the OPR upcycle and the expected decline in 2022 loan loss provisioning 

“For OPR hikes, we believe that their positive impact on banks’ net interest margins would outweigh the potential negative impact on loan growth and asset quality,” he further said.

Among CGS-CIMB’s top picks are RHB Bank, Hong Leong Bank Bhd and Public Bank.

In a separate report, CGS-CIMB economist Nazmi Idrus said BNM’s latest Monetary Policy Committee statement was more hawkish compared to the previous statement issued on May 11.

“The language this time around was more hawkish. On the global side, the statement was a repeat of May’s, with the bank noting that both the economic reopening and improvements in the labour market are contributing to a global recovery,” Nazmi said in a statement today.

However, he noted that the latest statement dropped mention of Covid-19 and changed the downside risks from commodity price shocks to elevated cost pressures, likely implying the more broadened inflationary conditions. 

On the domestic side, BNM highlighted that economic activity continued to strengthen as the economy entered the endemic phase, which pointed towards a bigger role for the domestic economy in driving growth going forward.

BNM also maintained its outlook and trajectory for annual headline inflation at 2.3% to 3.3% YoY and core at 2% to 3%. 

“However, it highlighted that headline inflation may be higher in some months due mainly to the base effect from electricity price.

“This likely refers to the reduction in electricity bill under the National People’s Well-Being and Economic Recovery Package fiscal package from July to September last year,” he said.

On top of that, BNM also reinserted its usual language that current monetary policy remains accommodative and reverted back to accessing evolving conditions and their implications on the overall outlook on domestic inflation and growth.

Looking forward, CGS-CIMB expects another 25bps hike in September before pausing in the November MPC meeting, bringing the OPR to 2.5% by the year-end. 

“From our perspective, the strength in domestic demand should remain fairly robust, owing to the myriad of policy support measures and impact of border reopening, which will likely extend to at least late of the third quarter of 2022,” he added.

However, the economist saw signs of a global slowdown that will likely gain prominence towards the year-end, on top of dissipating pent-up demand.

“In addition, domestic uncertainties, especially on election outlook, could have BNM preferring a hold on rates in November,” he said.

He also opined that the need for BNM to raise policy rates going forward sharply is lower as the consumer price index is still within BNM’s 2% to 3% annual target range, and is likely to remain somewhat within range throughout this year.

Nevertheless, BNM is expected to monitor economic developments going forward, especially if the growth in domestic demand is strong and unfettered amid the large subsidies. 

“In that eventuality, a third rate hike this year could even be on the cards. Next year, we price a further 50bps in rate hikes, putting the end-2023 OPR at 3%,” he further said.