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IN THE latest monetary policy statement, Bank Negara Malaysia (BNM) has raised the Overnight Policy Rate (OPR) by 25 basis points (bps) from 2.25% to 2.5%, largely in line with market consensus and our expectations. We anticipate BNM will introduce one more rate hike in the next Monetary Policy Committee (MPC) meeting in November 2022 to 2.75%, with two more 25bps hikes in the first half year 2023 to close at 3.25%. Our assumption is based on the “gradual and manner” rate hike schedule as mentioned in the MPC’s statement and rejuvenating domestic economic data allow room for more BNM’s interest rate normalisation.
Malaysia’s financial sector (as represented by the Bursa Financial Index) continued to show a modest improvement in the second quarter of 2022 (2Q22) in terms of revenue with 4.6% quarter-on-quarter (QoQ) and 1% year-on-year (YoY) growth from an expansion of loans, higher net interest margin (NIM) alongside lower loan impairment allowances. On a side note, most of the banks posted a decline in non-interest income (NOII) dragged by market pessimism. However, the earnings of Bursa Financial Index was dampened by -0.9% QoQ and -3.4% YoY in 2QY22 due to prosperity tax “Cukai Makmur” and the conservatism from Malayan Banking Bhd, the largest component in the index, to keep its loan provision remain elevated despite most of its peers have lowered the provision losses.
Moving forward, we anticipate that regained economic momentum and a rising interest rate environment could continue to improve the banks’ NIM to a higher stage and offset the losses from potentially lower NOII.
Generally, the higher interest rate would translate into wider NIM of banks with approximately 2bps-4bps on an annualised basis. Since BNM announced the rate hike, OPR only rose by 75bps vesus a total of 125bps reduction during the unprecedented Covid-19 era, suggesting room for more rate hikes moving forward during the path towards normalisation of monetary policy. As a result, the financial sector, particularly banks, are still net beneficiaries as we still remain at the early stages of the OPR hike cycle.
With the widely anticipated higher OPR coming soon, we see the preference for a fixed deposit (FD) will escalate and it could create tight deposit competition among banks to secure more FD loans, resulting in pressure to push the cost higher. Even if we see the deposit normalisation which current account savings account (CASA) ratio and FD ratio will go back to pre-Covid level, we do not think it will bring a crucial impact on banks’ forward earnings as the tailwinds from OPR hikes could nullify the decline in CASA ratio and higher FD ratio in loan books.
In the meantime, banks’ outstanding loans are showing significant expansion from RM192.91 billion in January 2022 to RM197.4 billion in July 2022 albeit the global economic slowdown with positive performances seen in all sectors. We view the increment in outstanding loans positively as this indicates a strong signal that Malaysia’s economy is doing fairly well compared to our global peers, backed by the recent strong 2Q22 GDP growth, a healthy unemployment rate of 3.7% and a manageable inflation rate of 4.4% in August 2022.
Banks have started to unwind the repayment assistance offered to borrowers during the lockdown era in tandem with the economic reopening. Based on the statistics from BNM, banks’ total provisions to total loan ratio have shown a clear downtrend from 1.84 in January 2022 to 1.78 in July 2022, indicating that with the easing of repayment assistance programmes, most banks are showing better confidence in the quality of their loan books. Although the easing of repayment assistance would potentially translate to a higher net impairment ratio (January 2022: 1.06, July 2022: 1.15), we see the losses as a one-off and it wouldn’t cloud the banks’ outlook.
On a valuation basis, it is still sufficiently decent for us to warrant our positive stance on the sector, underpinned by the better earnings assumption and dividend yields. Bursa Financial Index is still trading at a cheap discount to price-earnings ratio of 8.07x (versus 10-year average of 12.6x), around its -1 average five-year standard deviation as of end-July 2022 albeit the 7.08% gain YTD.
While market sentiment is showing signs of tepidness due to several global uncertainties such as inflationar y pressures and rising geopolitical tensions, we reckon banks could remain a buffer for investors who seek a defensive play with a stable dividend yield and with proven distribution history.
All in all, we reiterate our “positive” view on Malaysia’s financial sector underpinned by tailwinds including resilience fundamentals, promising earnings growth and sustainable dividend yield.
- The views expressed are of the research team and do not necessarily reflect the stand of the newspaper’s owners and editorial board.
- This article first appeared in The Malaysian Reserve weekly print edition.