Potential re-rating catalyst for banks on higher net interest margin

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PETALING JAYA: The domestic banking system’s earnings are on a recovery mode with higher profitability anticipated this year due to lower loan loss provisioning (LLP) and higher net interest margin (NIM).

Most analysts expect banks to record higher profits in the subsequent quarters after a relatively improved showing in the fourth quarter of 2021.

They forecast that Bank Negara would raise the key benchmark interest rate or overnight policy rate (OPR) in the second half of the year to curb inflationary pressures. A higher rate would translate into higher NIM for banks.

NIM is a measure of profitability for banks and refers to the difference between interest received and interest paid out by the banks.

Bank Negara has kept the OPR at 1.75%, which is at an all-time low since July 7, 2020.

CGS-CIMB Research banking analyst Winson Ng is reiterating an “overweight” rating on banks as he expects earnings recovery to continue in 2022 and 2023.

“Potential re-rating catalysts include an expansion in NIM following the expected OPR hike in the second half of this year, and a downcycle in LLP.

“In the longer term, there could be potential write-back of the management overlay provided by the banks for Covid-19 credit risks if the banks’ gross impaired loan ratios do not increase significantly in 2022.

“While Malaysian banks have negligible direct exposures to Russia and Ukraine, we believe they would be indirectly impacted if the energy and raw material prices remain higher for a prolonged period as it could hurt global economic growth.

“Our picks for the sector are Hong Leong Bank Bhd, RHB Bank Bhd and Public Bank Bhd,” he added.

Banks’ fourth quarter earnings were above the research house’s expectations with six out of eight Malaysian banks under its coverage reporting better-than-projected fourth quarter 2021 earnings due to higher net interest income and lower LLP.

The sector’s core net profit (CNP) grew 42.5% year-on-year (y-o-y) in the fourth quarter, driven by a 62.7% y-o-y plunge in LLP.

Ng said: “We expect the banks’ first quarter 2022 aggregate CNP to be close to the fourth quarter 2021 levels of RM6.5bil, as the additional tax expense under Cukai Makmur (CM) would be offset by higher non-interest income in the first quarter of 2022 (from improved investment income).

“Nevertheless, the first quarter CNP could see a single-digit y-o-y decline, dragged down by the CM taxation.”

Despite the negative impact of the CM taxation, Ng projected a CNP growth of 4.1% for the banks, underpinned by an expected 16% decline in LLP this year, and a turnaround in non-interest income from a decline of 15.2% in 2021 to an expansion of 10.2% this year.