Bank Earnings

RHB Research: RPO hikes expected to boost bank earnings by 1.8% for FY22

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The RHB Bank logo is seen at its Kuala Lumpur branch in this file photo from September 4, 2013. — Stock Photo Reuters

Thursday 07 July 2022 11:54 MYT

KUALA LUMPUR, July 7 – RHB Research estimates that 25 basis points (bps) overnight rate hikes (OPR) in May and similarly in July by Bank Negara Malaysia would boost the net profit of the banking sector by 1 .8% for FY2022 (FY22).

In its sector update on the banking sector today, the research house said a potential 25 basis point rate hike in September would further improve banks’ cumulative earnings to 2.2%.

“We will incorporate the rise in July and the third RPO into our guidance when we review the second quarter 2022 results ahead. We believe there are risks that the upward revision to net interest income will be somewhat offset by potentially lower commission income, given the volatility of the financial markets,” he added.

Currently, RHB Research forecasts 5.0% year-over-year (year-over-year) growth in banking sector profits for FY22.

“Similar to the May 2022 interest rate hike, we expect banks to raise base and base rates by 25 basis points.

“Deposit rates, particularly for term deposits, are also expected to increase by the same amount, although full pass-through to higher funding costs will only be evident after deposits are fully re-priced in three to four months,” he added.

RHB Research noted that Bank Islam Malaysia (BIMB), Affin Bank and Alliance Bank Malaysia (ABMB) would see the biggest net interest margin (NIM) expansion and profit increase.

“Based on forecasts that a 12-month impact of a 25 basis point OPR hike would increase NIMs by 4.0 to 5.0 basis points for Affin and ABMB, and 5.0 at 6.0 basis points for BIMB, our calculations indicate an improvement in net profit of around 3% for Affin and ABMB, and around 5% for BIMB.

“For large banks, an expansion in NIMs of 2.0 to 4.0 basis points would translate into an increase in earnings of 1.0 to 2.0%,” said RHB Research.

At the same time, CGS-CIMB Research expects the RPO increase to be positive for banks, as their total floating rate loans are greater than their total fixed deposits, both of which would be revised. upwards depending on the increase in the OPR.

“We factored a full 50 basis point hike in 2022 into our earnings forecast for banks. Each additional 25 basis point hike would increase our net earnings forecast for banks by approximately 2.1% ( for FY24 for Hong Leong Bank, AMMB and Alliance Bank, and FY23 for the rest),” he added.

Still, the research house noted that interest rate hikes could be negative for banks’ loan growth and asset quality, as they lead to higher borrowing costs and higher monthly loan repayments. .

As such, it had factored the deterioration of the above into its projected loan growth of 4.0-5.0% for 2022 from 5.0% year-on-year at the end of May 22, and a increase in the gross ratio of impaired loans from 1.64% at the end of -22 May to 1.8-2.0% at the end of December 2022.

“The RPO bull cycle and expected decline in loan loss provisioning in 2022 are potential catalysts for the re-rating of our ‘overweight’ call on banks.

“With respect to RPO increases, we believe their positive impact on banks’ NIMs would outweigh the potential negative impact on loan growth and asset quality,” he added. .

At 10:55 a.m., Public Bank gained one sen at RM4.40, BIMB was up two sen at RM2.66, while Maybank, CIMB and Hong Leong Bank were flat at RM8.62, RM5.10 and RM20.38, respectively.

RHB Bank declined five sen to RM5.67, Affin Bank eased two sen to RM1.92 and ABMB reduced one sen to RM3.29. — Bernama