RHB Research: OPR hikes likely to raise banks' earnings by 1.8pc for FY22

KUALA LUMPUR, July 7 — RHB Research estimates that the overnight policy rate (OPR) hikes of 25 basis points (bps) in May and similarly in July by Bank Negara Malaysia would raise banking sector’s net profit by 1.8 per cent for the financial year 2022 (FY22).

In its sector update on the banking sector today, the research house said a potential rate hike of 25bps in September would further improve the banks’ cumulative earnings to 2.2 per cent.

“We will incorporate the July and third OPR hike into our forecasts when we review the coming second quarter of 2022 results. We believe that there are risks that the upward revision in net interest income could be somewhat offset by potentially lower fee income, given the volatility in financial markets,” it added.

Currently, RHB Research is projecting a 5.0 per cent year-on-year (y-o-y) growth in the banking sector earnings for FY22.

“Like the May 2022 interest rate hike, we expect banks to raise base lending rates and base rates by the full 25bps.

“Deposit rates, especially for fixed deposits, should also rise by the same quantum, although the full transmission to higher funding costs will only be evident after deposits are fully re-priced in three-four months,” it added.

RHB Research noted that Bank Islam Malaysia (BIMB), Affin Bank and Alliance Bank Malaysia (ABMB) would see the biggest net interest margin (NIM) expansion and earnings boost.

“Based on guidance that a 12-month impact from a 25bps OPR hike would lift NIMs by 4.0-5.0bps for Affin and ABMB, and 5.0-6.0bps for BIMB, our calculations point to net profit improvement of around three per cent for Affin and ABMB, and around five per cent for BIMB.

“As for the large banks, NIMs expansion of 2.0-4.0bps would translate into earnings rising by 1.0-2.0 per cent,” said RHB Research.

Meanwhile, CGS-CIMB Research expects the OPR hike to be positive for banks as their total floating rate loans are larger than their total fixed deposits, both of which would be repriced upward in line with the OPR hike.

“We have factored in a total hike of 50bps in 2022 in our earnings forecasts for banks. Every additional 25bps hike would increase our net profit forecasts for banks by an estimated 2.1 per cent (for FY24 for Hong Leong Bank, AMMB and Alliance Bank, and FY23 for the rest),” it added.

Nonetheless, the research house noted that 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.

As such, it had factored in the deterioration for the above in its projected loan growth of 4.0- 5.0 per cent for 2022 versus 5.0 per cent y-o-y at end-May 22, and an increase in gross impaired loan ratio from 1.64 per cent at end-May 22 to 1.8-2.0 per cent at end-December 2022.

“The OPR upcycle and the expected decline in 2022 loan loss provisioning are the potential re-rating catalysts for our ‘overweight’ call on banks.

“As for the OPR hikes, we believe that their positive impact on banks’ NIMs would outweigh the potential negative impact on loan growth and asset quality,” it added.

At 10.55am, Public Bank gained one sen to RM4.40, BIMB rose two sen to RM2.66, while Maybank, CIMB and Hong Leong Bank were flat at RM8.62, RM5.10 and RM20.38, respectively.

RHB Bank declined five sen to RM5.67, Affin Bank eased two sen to RM1.92 and ABMB discounted one sen to RM3.29. — Bernama