KUALA LUMPUR (Oct 1): Hong Leong Investment Bank (HLIB) Research does not foresee any more overnight policy rate (OPR) cuts for the banking sector for the rest of 2020.

The research house noted that the average lending and three-month board fixed deposit rates slipped by six basis points (bps) and 1bps month-on-month (m-o-m) respectively. As a result, the spread contracted by 5bps m-o-m to 2.02%. 

“We reckon the squeeze will persist and we expect weaker net interest margins (NIMs) for 3Q20 (third quarter of 2020) given July 2020’s OPR reduction, but it is poised to recover in 4Q20 and 2021 from downward deposit repricing. We do not foresee any more OPR cuts for the rest of 2020,” wrote HLIB Research analyst Chan Jit Hoong in a note today. 

Chan said asset quality improved as the gross impaired loan (GIL) ratio ticked down by 3bps m-o-m to 1.4%, led by the household segment (-4bps), which he believes was due to the effect of loan deferment. 

“Since the government has agreed to extend the loan moratorium and banks will provide targeted assistance, we see the sector’s GIL ratio remain at low levels for the rest of the year. However, it may hide actual damage and cause a lag in non-performing loan (NPL) formation if the situation does not improve rapidly or the advent of Covid-19's second wave paralyses the country,” he said. 

Chan maintained his "neutral" stance on the banking sector as he believes it is too early to claim that pain points from the Covid-19 crisis are over, especially when infection cases are on the rise again and the sector has to contend with risk of the earnings recovery turning U- or W-shape (from the current V-shape projection). 

“However, these are balanced out by deflated valuations. 

The only bank we like now is RHB Bank Bhd ("buy"; target price [TP]: RM5.80) given its appealing risk-reward profile, backed by undemanding valuations, a strong 16.6% CET1 ratio (sector: 14.4%) and fairly large untapped fair value through other comprehensive income reserves. 

"Separately, we have a ‘sell’ rating for Public Bank Bhd (TP: RM14.80) for rich valuations,” he added.