More OPR hikes ahead, says Kenanga Research

KUALA LUMPUR: Kenanga Investment Bank research believes the central bank's decision to raise the overnight policy rates by 25 bps to 2.25% (from 2.0%) could be a prelude to "further increases in the coming 12 months".

It said on Friday, March 5 the impact of the rate hike on the banks depends on the inter-bank rates;  base lending rates + variable-rate loans, fixed-rate loans and sector risk.

It said Malaysian banks have more assets sensitive balance sheet, going forward earning is skewing toward the upside. Net interest margins (NIMs) are likely to expand as asset yields re-price faster than cost of fund.

The immediate impact of OPR hike is inter-bank rate. The research house said it sees possibility of interbank rates increase by 25bps from March onward. 

"Besides inter-bank rates, we believe BLRs should increase in tandem with OPR by 25 bps to re-price the current BLR-based loans. Rate hike would increase average lending rates.  Banks with higher portions of variable-rate loans should fare comparatively better. Among the banks, Hong Leong Bank (81% of total), Public Bank (73%) and Maybank (73%) have the highest portion of variable-rate loans," it said.

Kenanga research said fixed-rate loans such as hire purchase may not re-price for five to seven years. AMMB (57% of total) and EON (43%) are biggest losers with the highest portion of fixed-rate loan.  Government-linked banks, namely Maybank and CIMB, fare comparatively better than consumer banks, owing to larger low-cost deposit bases and variable-rate loan portfolios.

It noted that the duration of investment and dealing securities, namely bonds, is difficult to determine from the limited disclosures. Banks under its coverage suggests that their respective managements have been anticipating a rate hike and would position themselves accordingly.  However, it expects investment banks, that is CIMB and AMMB would face substantial mark-to-market losss pressure.

On the overall, Kenanga research believed the rate hike would have positive impacts to the banks’ earning.  
It suggested investors should have BUY traditional banks (Public Bank and Hong Leong Bank) for net interest margin recovery.

"We believe their asset should re-price faster than liability in an environment of rate hike, hence, NIM should recover faster than peers.

"While we looking for market correction, investment banks with high Beta which are trading close to 2007 high level, offer limited upside from here.  We maintain our SELL on CIMB and AMMB after a strong rally in 2009," it said.