This article first appeared in The Edge Financial Daily on March 5, 2020

Banking sector
Maintain positive: Bank Negara Malaysia announced another cut to its overnight policy rate (OPR) of 25 basis points on Tuesday, bringing the OPR to 2.50%. While we had expected another OPR cut to follow the reduction in January, we expected it would have been in May. Nevertheless, the magnitude of the cut was as per our economics team’s expectation.

We believe that the OPR cut was not a signal of any imminent recession. Our economics team expects that gross domestic product will continue to grow this year, albeit at a slower pace when compared with last year. In our view, the second OPR cut was a pre-emptive measure to stimulate growth against the backdrop of intensifying Covid-19 outbreak.

An OPR cut will have a negative impact to banks’ earnings from downward pressure in net interest income due to net interest margin compression. This is due to the fact that there will be a near-immediate downward adjustment to loans and financing which has a floating rate, while term deposits (such as fixed deposits) are repriced after maturity. The floating rate loans, on average, contributed to about 79.2% of total loan book of banks under our coverage as at end December 2019.

In our opinion, the impact of this OPR cut has also been fully priced in earlier given the price reaction to banking stocks under our coverage. Nevertheless, we view that banking stocks in general are relatively still undervalued. Majority of the banks are trading below their five-year historical average. We opine that this is unjustified given that in our view, banks have thus far managed to navigate headwinds the sector had faced and will likely continue to do so.

We observed that banks’ asset quality has been stable so far. Furthermore, there are some leeway given to banks, as we understand that rescheduled and restructuring of small and medium enterprise accounts do not have to be classified as impaired. Therefore, our top picks for this sector are banks with scale and size or the potential to maintain its earnings momentum. These are Malayan Banking Bhd (“buy”; target price [TP]: RM9.55), CIMB Group Holdings Bhd (“buy”; TP: RM5.70) and RHB Bank Bhd (“buy”; TP: RM6.30). Good dividends yields will be an added bonus. — MIDF Research, March 4