Banking Sector. (Neutral) BNM Cut 25bps OPR in Unexpected Move

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1 M&A Securities PP14767/09/2012(030761) Tuesday, July 19, 2016 Banking Sector (Neutral) BNM Cut 25bps OPR in Unexpected Move The move by BNM to cut OPR by 25bps will have reverberating impact to the banking sector as it will further compress net interest margin (NIM) but at the same time it will further stimulate loans growth and encourage people to spend. Banking sector is NEUTRAL in 2016 and our top picks are Public Bank (TP: RM21.38) and BIMB Holdings (TP: RM4.28). BNM cut OPR for the first time in seven years. Bank Negara Malaysia has unexpectedly cut the Overnight Policy Rate (OPR) by 25 basis points to 3% at its Monetary Policy Committee (MPC) meeting recently, citing rising risks from Britain's exit from the European Union. The ceiling and floor rates of the corridor for the OPR have been correspondingly reduced to 3.25% and 2.75% respectively. What the cut signals? As Malaysia s 2Q GDP growth numbers are only due to be released in August 2016, BNM s decision to cut the OPR by 25 bps came as a surprise to the market as the usual practice is that the governor will give hints on the OPR adjustment. Now, BNM has cut the OPR rather than later to ensure the 4%-4.5% GDP target this year remain achievable by boosting the domestic demand. As stressed in the policy statement, such action was pre-emptive move to ensure economic growth as a results of various external factors such as Brexit which could put pressure on the growth of our economy Impact to bank. The cut in OPR will witness banks will be busy for the rest of the year as this will involve the adjustment in bank s Base Rate (BR) and eventually the re-pricing of variable loan that requires some time to tweak. Additionally, bank will be busy to manage further compression in NIM in the short term due to the change in BR (although its short-lived) as it places pressure on banks average lending rate. Nevertheless, in the long term, we expect banks will adjust their Fixed Deposits (FD) rates to abate the NIM compression though we expect banks to adjust FD rates later than BR adjustment as the recent BR adjustment manages to cool down the impact of NIM compression. In the long run, we expect banks will have their hands full for loan applications in selected segment, especially property in household segment and manufacturing and construction in the business segment. Impact to earnings. At this juncture, we expect a minimal impact to banks this year due to the timing of the adjustment which already entering third quarter results and big chunks of large applications were already settled in and we would only feel the full impact in the next calendar year. Nevertheless, at this stage banks with high variable rate composition will have negative impact ext. 257, 221, 260, 1

2 to the OPR cut and banks with high fixed rate composition or a higher percentage of CASA deposits (that do not reprice as much as fixed deposits) will stand as beneficial to the announcement. Based on this, we found Alliance Financial Group (AFG) stands as biggest loser as its variable rate loans comprise 90.4% of its total loans while we expect BIMB Holdings (BIMB) and CIMB Group Holdings (CIMB) will manage to offset further NIM compression due to high CASA composition. All in, we will make adjustment to our earnings forecast after all of the banks reprice their BR to give true colors of the OPR cut. Impact to loans growth. Despite we expect the cut in OPR will further compress NIM, in the long term we expect loan applications to pick up later this year and continue into 2017 given lower borrowing cost as a result of the cut in BR. However the high household debt could be major stumbling block to the loans growth as banks are trying to cap the gross impaired loans that could slow down the loans approvals and banks chasing quality borrowers. Asset quality. Given the anticipated surge in loan application, we do not see any big deterioration in banks asset quality given banks still maintain their rulings to curb household debt. Nevertheless, the extra money in consumer pocket will ensure their credit profile increasing. Conclusion and Recommendations 2015 will see banks slower but steady earnings growth due to the slowdown in HH loans segment that account for about 50% of banking system loans growth. However, we foresee this situation could improve at the back of a pickup in lending from business loans linked to financing of ETP-related projects and also refinancing activities by listed companies from conventional debts to shariahcompliant instruments. Banking sector is a NEUTRAL in 2015 with 2 banks emerge as our Top Pick namely Maybank (TP: RM9.92) and BIMB Holdings (TP: RM4.63). Price (RM) Table 1: Peers Comparison EPS (RM) P/E (x) P/B (X) ROE (%) Div Yield (%) Company YE FY16 FY17 FY16 FY17 FY16 FY17 AFG Mac Hold AMMB Mac Hold BIMB Dec Buy CIMB Dec Hold Maybank Dec Hold RHB Bank Dec Hold Public TP (RM) Dec Buy Bank Affin Dec NR NR MBSB Dec NR NR STMB Dec NA NR NR HL Bank Jun NR NR Average Source: BNM, M&A Securities Call 2

3 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Percentage % Market Access Table 2: Loans Growth Y-o-Y Company Year Ended Sept-14 Dec-14 Mar-15 Jun-15 Sept-15 Dec-15 Mar-16 AFG March 14.9% 16.3% 14.7% 12.5% 10.2% 8.5% 4.9% AMMB March 0.9% 0.7% -1.6% -2.2% 0.1% -0.7% 0.1% CIMB Dec 9.3% 12.8% 12.5% 16.1% 19.3% 12.5% 7.1% Maybank Dec 13.8% 13.3% 14.2% 15.6% 20.1% 12.3% 5.7% PBK June 10.2% 10.8% 11.7% 11.5% 12.9% 11.6% 9.5% RHB Bank Dec 12.0% 17.0% 13.7% 9.2% 11.4% 6.3% 4.3% Source: Bursa Malaysia, M&A Securities Table 3: Variable Rate Loan Composition Banks % Variable Rate CASA Ratio AFG 90.4% 32.1% AMMB 65.0% 20.7% BIMB 83.7% 37.2% CIMB 83.2% 37.0% Maybank 69.3% 33.3% RHB Bank 80.0% 24.1% Public Bank 76.1% 22.6% OPR Movement (Sep 08-July 16) 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% OPR 3

4 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 1-Jan 13-Jan 25-Jan 6-Feb 18-Feb 1-Mar 13-Mar 25-Mar 6-Apr 18-Apr 30-Apr 12-May 24-May 5-Jun 17-Jun 29-Jun 11-Jul Point Point FBM KLCI vs Financial Index (January YTD) Banking Share Performance (January 2016-YTD) 17,000 1, ,000 1, ,000 1, ,000 1, ,000 1, ,000 1,400 KLFinancial Index FBMKLCI Index FBM KLCI Index Maybank AMMB MSM Fin Index CIMB AFG Parkson Source: Bloomberg, M&A Securities 4

5 M&A Securities STOCK RECOMMENDATIONS BUY Share price is expected to be +10% over the next 12 months. TRADING BUY Share price is expected to be +10% within 3-months due to positive newsflow. HOLD Share price is expected to be between -10% and +10% over the next 12 months. SELL Share price is expected to be -10% over the next 12 months. SECTOR RECOMMENDATIONS OVERWEIGHT The sector is expected to outperform the FBM KLCI over the next 12 months. NEUTRAL The sector is expected to perform in line with the FBM KLCI over the next 12 months. UNDERWEIGHT The sector is expected to underperform the FBM KLCI over the next 12 months. DISCLOSURES AND DISCLAIMER This report has been prepared by M&A SECURITIES SDN BHD. Readers should be fully aware that this report is for informational purposes only and no representation or warranty, expressed or implied is made as to the accuracy, completeness or reliability of the information or opinion contained herein. The recommendation and opinion are based on information obtained or derived from sources believed to be reliable. This report contains financial forecast/projection based on our assumptions which may defer from the actual financial results announced by the companies under coverage. All opinions, estimates and assumptions are subject to change without notice. Analysts will initiate, update and cease coverage solely at the discretion of M&A SECURITIES SDN BHD. Investors are to be cautioned that value of any securities invested may fluctuate from time to time. We advise investors to seek financial, legal and other advice for investing based on the recommendation of our report as we have not taken into account each investors specific investment objectives, risk tolerance and financial position. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. M&A SECURITIES SDN BHD can accept no liability for any consequential loss or damage whether direct or indirect. Investment should be made at investors own risks. M&A SECURITIES SDN BHD and INSAS GROUP of companies, their respective directors, officers, employees and connected parties may have interest in any of the securities mentioned and may benefit from the information herein. M&A SECURITIES SDN BHD and INSAS GROUP of companies and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. This report may not be reproduced, distributed or published in any form or for any purpose. M & A Securities SdnBhd (15017-H) (A wholly-owned subsidiary of INSAS BERHAD) A Participating Organisation of Bursa Malaysia Securities Berhad Principal Office: Level 1,2,3 No.45 & 47,43-6 The Boulevard, Mid Valley City, Lingkaran Syed Putra, Kuala Lumpur Tel: Fax: Website: 5