After a long session during which several legislators tried to sabotage the president’s attempts to remove the interest rate cap, the repeal eventually sailed through. This was as we had expected – we regard the news as positive for domestic banks.
Risk remains
During the proceedings, it was clear that legislators were not united in repealing the rate cap and that there was significant dissent. The campaign to repeal won because of simple parliamentary maths rather than collective positive sentiment. Two-thirds of legislators (233) would have had to vote to overturn the president’s recommendation, but only 161 legislators were present.
In our view, given the opposition to the removal of the rate cap, there is still a risk that legislators will again try to rein in the banks via limits on interest rates. Any future law would only need a simple majority vote of present members of parliament, rather than the two-thirds majority required to defeat today’s repeal.
Our valuations hold an upside
Our valuations on banks had assumed the rate cap would remain in place. In light of the removal of the rate cap, we will adjust our models and revise our loan book growth, deposit growth and net interest margin estimates. We expect the impact of the repeal to be evident in earnings in Q1 20, as banks will need to revise their strategies this quarter.
Equity Group the winner of the day
Equity Group has been accumulating liquidity, ready for the rate cap's repeal. With a liquidity ratio of close to 60% and a historical trend of more aggressive lending than peers, we expect Equity Group to record relatively fast credit growth. Additionally, the bank’s key clientele are retail and SME clients, most of whom were locked out of the credit market.
Compared with the sector as a whole, Equity Group also has shorter-term loans; hence, the impact of new higher-priced loans will be evident much sooner. Lastly, the bank has access to low-cost retail deposits; therefore, limiting the upward revision of cost of funds.