Lenders seen to continue fine run

KUALA LUMPUR: After emerging from a strong fourth quarter last year pursuant to the recent conclusion of the earnings reporting season, the Malaysian banking sector appears to be poised to continue its strong run in the near term.


This would be true theoretically even as extraordinary factors which had encumbered bottom lines for the banks last year such as the “cukai makmur” or prosperity tax will not be continued anymore this year onwards.

Despite the effects of the one-off tax, Malaysian banks had projected great strength and mainly outperformed in the fourth quarter of last year, beating most analyst estimates.

While a potentially softer loan growth environment could ease some of these high expectations coming into the final month of first-quarter 2023, some analysts are expecting that bottomline support could come from the non-interest income segment of the banking business.

Write-backs have also been guided by several bank’s managements in their recent briefings and these are anticipated even as loans come out from their relief programmes as the economy emerges from the pandemic.

“Looking ahead to the year 2023, banks should enjoy an acceleration in earnings as the effective tax rate normalises. But net interest margins (NIM) will be pressured from funding costs – and there possibly may be up to double-digit NIM compression, based on management’s guidances,” RHB Research said.

However, it noted that compensating factors for this was the decent deal pipelines that may be seen in the investment banking space and lower credit costs as well.

With a current “overweight” rating on the banking sector, RHB Research said in its report that it has not yet factored in the potential write-backs for the banks overall in its earnings forecasts.

“Also, given that most banks are well-capitalised, we expect shareholder returns to be an ongoing theme for investors as well and it’s an area of interest,” it said.

RHB Research had rated all the largely capitalised banks on Bursa Malaysia a “buy”, including Malayan Banking Bhd (Maybank) with a target price of RM10.20, CIMB Group Holdings Bhd with a target price of RM7, Public Bank Bhd with a target price of RM5 and Hong Leong Bank Bhd with a target price of RM24.60.

Maybank Research noted that banks ended 2022 with record quarterly earnings on rising interest rates and low credit costs.

“Reflecting full resumption of economic activities post the pandemic, banks’ core earnings rose 10% year-on-year (y-o-y) in 2022 to a new high,” Maybank Research said.

However, it noted that bank’s NIMs are expected to retreat this year as competition for deposits heats up and investment gains will also remain uncertain due to volatile bond yields.

Other factors that could potentially hold back the banking sector’s performance this year include the normalisation of the automotive sector’s extraordinary gains seen in the previous year on the sales and service tax exemption boost.

According to CGS-CIMB Research, early signs of this trend had been spotted in the recent banking statistics which showed a further moderation in loan growth in January 2023.

“Growth slowed down for both major loan segments – from 5.9% y-o-y in December 2022 to 5.6% y-o-y in January 2023 for household loans and from 3.4% y-o-y to 2% y-o-y for business loans for the same periods,” CGS-CIMB Research said.

Further downside to loan growth is expected in the next couple of months pursuant to the weak leading loan indicators, it said.

“Both y-o-y loan applications and approvals fell in January 2023, by 13.2% and 6.1%, respectively. We think the downside to overall loan growth would come from the household loan segment, specifically from the auto loans as we expect a decline in auto sales this year,” it added.

CGS-CIMB Research had also reiterated its projected loan growth would be 4% to 5% for the entire industry this year which is lower than the 5.7% that was recorded in 2022.

Despite these potential weaknesses within the banking space, CGS-CIMB Research had affirmed its “overweight” call on the sector.

“This is predicated on the potential re-rating catalysts of the expected recovery in non-interest income growth this year and potential write-backs of management overlay which would then reduce the banks’ loan loss provisioning,” it said.

Among the research community, Hong Leong Investment Bank Research (HLIB Research) appeared to be the most cautious of the banking sector’s prospects with it maintaining its “neutral” rating for the sector.

“There were little surprises this reporting season where six out of eight banks under our coverage posting profits that were within expectations. These are Affin Bank Bhd, Alliance Bank Malaysia Bhd, BIMB Holdings Bhd, CIMB, Maybank and RHB Bank Bhd.

“There were only two beats wherein AMMB Holdings Bhd had booked in a stronger-than-anticipated total income growth while Public Bank saw lower-than-expected loan loss provisioning,” HLIB Research said.

It noted that tailwinds which were supposed to be enjoyed by banks such as the large NIM expansion, strong credit growth over in the 2022 to 2023 period have been front-loaded to last year.

This would imply that the next 10 months will be less exciting for the banks, HLIB Research said.

“Furthermore, the banking sector may now have to grapple with possibly steeper cost of funds, smaller non-interest income, and loan growth,” it said. “We expect sequential NIMs to shrink,” it added.

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