REITs rise, banks decline on Bursa following OPR cut

KUALA LUMPUR (July 15): Real estate investment trust (REIT) prices rose in early trades on Bursa Malaysia yesterday following Bank Negara Malaysia’s move to cut the overnight policy rate (OPR), but pared gains in the afternoon.

This was on the back of a 0.34% or 5.61-point decline of the FBM KLCI to 1,654.78, following a drop in crude oil prices amid record-high US inventory.

Axis REIT rose 5.71% to RM1.85, before paring gains to close at RM1.76 (with a market capitalisation of RM1.99 billion). KLCC REIT gained 0.39% or three sen to RM7.73 before closing 10 sen or 1.3% lower at RM7.60 (market cap: RM13.85 billion).

Sunway REIT rose 0.57% or one sen to RM1.75, before settling  unchanged at RM1.74 (market cap:  RM5 billion), whie IGB REIT rose 1.78% or three sen to RM1.72, before closing three sen or 1.78% lower at RM1.66 (market cap: RM5.85 billion); Capitaland Malaysia Mall Trust slipped two sen  to RM1.58 (market cap: RM3.23 billion).

In a note yesterday, Hong Leong Investment Bank Research upgraded REITs to “overweight”, saying the OPR cut will bode well for REITs as yield assets are often sought after during monetary easing due to their stability and high-yielding nature.

Its analyst Lee Meng Horng said the potential downside for Malaysian REITs from external factors is limited, with no immediate risk of narrowing yield spread due to the monetary easing and its relative attractiveness amid the low-yield environment.

CIMB Investment Bank has, however, kept its “neutral” call on REITs, saying prices have largely priced in the yield-seeking sentiment of investors and lower-interest-rate expectations, with yields already compressed to an average of 5% to 5.3%. “Note that the REITs under our coverage traded at their highest average yields of 5.1% in 2014, which are largely in line with current average yields,” said its analyst Kristine Wong.

She also said although the OPR cut could see consumers pocket an extra RM2.1 billion a year from lower interest payments, it is unlikely to result in a spike in consumer spending in the near term due to the uncertain global economy.

Kenanga Research also stayed “neutral” on REITs, saying the sector still lacks apparent catalyst, while downsides are already largely priced in. It expects modest earnings growth from REITs in its coverage universe, at an average of 6.7% to 5.1% in financial years 2016 and 2017.

Meanwhile, most banking stocks fell yesterday. Analysts believed the OPR cut would be negative for the sector as it would result in net interest margin compression due to the downwards repricing of floating-rated loans and the lag in the repricing of fixed-rated deposits.

However, they largely kept their ratings on the sector unchanged as each of the banks would see different impacts on the key interest rate cut.

Hong Leong IB Research analyst Chye Wen Fei said the OPR cut would be negative to Public Bank Bhd, Malayan Banking Bhd (Maybank), RHB Bank Bhd and Affin Holdings Bhd due to negative balance sheet gap, measured by asset minus liability. On the flipside, AMMB Holdings Bhd and Alliance Financial Group Bhd (AFG) will gain due to positive balance sheet gap.

AFG shares closed unchanged at RM4.13 (market cap: RM6.3 billion), while CIMB Group Holdings Bhd fell 2.55% or 11 sen to RM4.21 (market cap: RM36.84 billion).

Maybank fell 1.23% or 10 sen lower to RM8.02 (market cap of RM80.57 billion) while Public Bank rose 0.21% or four sen to RM19.44 (market cap: RM74.91 billion).

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This article first appeared in The Edge Financial Daily, on July 15, 2016. Subscribe to The Edge Financial Daily here.