This article first appeared in The Edge Financial Daily on February 14, 2020
Banking sector
Maintain overweight: Year to date, the 10-year Malaysian Government Securities (MSG) yield has declined about 43 basis points (bps) to 2.87%. We believe that this was due to the Covid-19 outbreak, causing investors to turn more cautious with an increase in demand for bonds. Nevertheless, the drop in yield is expected to result in positive revaluations or mark-to-market gains in bonds held by banks. This is anticipated to lift banks’ non-interest income for the first quarter of 2020 (1Q20) and mitigate some of the impact from the recently announced overnight policy rate (OPR) cut of 25bps on Jan 22, 2020 on net interest income.
There is room for further rate cuts but this will depend on the severity of the Covid-19 outbreak and if it poses further risk to domestic economic growth. The OPR reduction of 25bps on Jan 22 was accelerated even though the market had widely expected it to be announced later in 2020. It was a pre-emptive rate cut and likely to be due to the Covid-19 outbreak. Moving forward, Bank Negara Malaysia has highlighted that its monetary policy considerations will be guided by the risk to domestic growth and inflation. Should the spread of the Covid-19 be contained by 1Q20, coupled with the announcement of a stimulus package to boost the aviation, retail and tourism sectors affected by the virus by the end of February or early March 2020 as reported by the media, we believe it is possible that further rate cuts could be held back. In the event that the effects from the stimulus package kick in fast, we believe that it could potentially be more impactful in lifting consumer confidence than just cutting interest rates further.
Acceleration of work for large infrastructure projects will be helpful to support 2020’s gross domestic product (GDP) growth and minimise downside risk. The central bank highlighted that the resumption of large infrastructure projects will contribute to about 1% of growth.
Our GDP growth forecast for 2020 is now revised to 4% from 4.6% earlier. Despite the weaker 4Q19 GDP growth at 3.6% in 4Q19, the full-year 2019 GDP expansion of 4.3% was in line with the central bank’s guidance of 4.3% to 4.8%. Our loan growth expectation for the sector remains at 4% for 2020.
The impact of any OPR change will be short-term (estimated three to six months) as the repricing of deposits to lower rates will eventually catch up with the drop in lending rates. The silver lining is the aforementioned potential unrealised mark-to-market gains in bonds as well as realised gains from any sale of securities benefitting from the decline in yields. This will mitigate the impact of OPR cuts while supporting banks’ return on equities and share prices.
We maintain “overweight” on the sector. As we are already in the results season, we leave our forecasts unchanged for now and look closely to the management’s guidance for financial year 2020 (FY20). Our top picks continue to be Malayan Banking Bhd (fair value [FV]: RM9.70/share), RHB Bank Bhd (FV: RM6.50/share) and Hong Leong Bank Bhd (FV: RM18.90/share). We continue to see valuations of banks compelling with the sector trading at an average price-to-book value ratio of one times for FY20 while average dividend yields remain attractive. — AmInvestment Bank, Feb 13