Base rate hikes new earnings catalysts for banks, says CIMB Research
Posted on June 16, 2016
KUALA LUMPUR: CIMB Equities Research sees the base rate (BR) hikes for a few banks as a new earnings catalyst for the banking sector as it reaffirms its Overweight call on Malaysian banks.
It said on Thursday the Overweight call was based on the potential re-rating catalysts of (1) expected earnings recovery in 2016, and (2) attractive valuations for a few banks.
“RHB Capital remains our top pick for the sector. We retain our earnings forecasts for now but could raise our projections if the BR hikes push up banks’ earnings above our expectations in the coming quarters,” it said.
CIMB Bank has raised its BR by 10bp to 4.1% effective June 9, 2016. Before this, three other banks had upped their
BRs – by 10bp each for Hong Leong Bank (on April 15) and Public Bank (on May 17) as well as by 20bp for AMMB Holdings (in December 2015). Three foreign banks in Malaysia also increased their BRs by 10bps to 20bp over the past few months.
“Given the escalating cost of funds, we previously thought that banks would increase the spread for housing loans, which would only affect the lending rates for new loans. But the above banks even took a step further by raising their BRs, leading to higher interest charged for all their existing variable-rate loans, which account for more than 50% of their loan books.
“The incremental interest income earned will flow directly to banks’ bottom line, boosting their FY17-18 net profit by an estimated circa 2.8% for Public Bank and 3.1% for Hong Leong Bank,” it said.
CIMB Research said Maybank so far does not have plans to raise its BR. However, the research house sees a reasonable chance for it do to so in the near term, considering that two of its biggest competitors have upped the rates.
“We estimate that a 10bp rise in Maybank’s BR would lift its FY17-18 net profit by circa 1.5%,” it said.
The research house said the 10bp rise in several banks’ BRs lately would have a minimal negative impact on their loan growth and asset quality, as this would only lead to a small increase 0in borrowers’ monthly instalments.
“Based on our calculation, a 10bp rise in BR would raise the monthly instalment of a 10-year loan by only 0.7%, which would be easily absorbed by borrowers, in our view,” it added.
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