The marked improvement and sustainable recovery in the economy has prompted Bank Negara (BNM) to raise the Overnight Policy Rate (OPR) by 25bps to 2.25%. The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 2.00% and 2.50% respectively but the Statutory Reserve Requirement (SRR) was retained at 1.00%. As the increase in rates is from abnormal lows and expected to be gradual over the course of the year, estimated at +75bps by end-2010, we expect banks to benefit from widening net interest margins, with little impact on loans growth and NPLs. The normalizing of interest rates as opposed to tightening amid a sustained economic recovery should help sustain banks’ earnings momentum, thus underpinning our Overweight recommendation on the sector. Our top big cap pick remains CIMB (TP:14.90) and within the mid to smaller cap space, we like AMMB (TP:RM5.35) and RHBCap (TP:6.70)
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