Downward pressure on NIM likely to ease

RHB Research expects the banking sector to post a 12% year-on-year growth to its net profit in FY23, supported by the normalisation of tax rates.

PETALING JAYA: In the midst of prevailing macroeconomic uncertainties, there are signs that the peak of net interest margin (NIM) pressure has been reached, potentially signalling a path towards recovery.

RHB Research believes that the unexpectedly steep decline in NIM between 16 and 46 basis points during the first quarter of 2023 (1Q23) could be seen as a significant event that helps alleviate concerns.

Hence, it believes the further downward pressure on NIM could ease going forward, while attributing it to a few other factors.

“First, some semblance of rationality has returned, with banks cutting deposit rates post-1Q23,” the research house explained in a report.

Second, given the earlier anticipation of multiple rate hikes, RHB Research believes banks pre-funded growth.

Therefore, the brokerage expects banks to allow these high-cost wholesale deposits to run off and to protect their NIMs.

“Third, some banks are looking to shorten the duration of deposits. Finally, May’s overnight policy rate hike should provide relief to NIM pressure,” it added.

RHB Research pointed out that despite the unexpected NIM squeeze in 1Q23, most banks are maintaining their full-year guidance for now.

However, it noted that both CIMB Group Holdings Bhd and Hong Leong Bank Bhd lowered their NIM projections but maintained return on equity (ROE) estimates for financial year 2023 (FY23), as they believe the slack can be compensated from other areas.

“As such, while we think there could be downside risk to general NIM guidance, the overall impact to ROE should be manageable – cushioned by healthy non-interest income and potential overlay writebacks,” RHB Research said.

All in all, the 1Q23 results season reinforces the research house’s view that the Malaysian banks under its coverage have levers to support earnings and dividend growth.

The first quarter NIM squeeze was also cushioned by robust non-interest income, benign credit costs and normalising tax rate, it noted.

RHB Research suggested that the current low valuations of banking stocks indicate concerns are mostly in the price, while yields are attractive.

The research outfit expects the banking sector to post a 12% year-on-year (y-o-y) growth to its net profit for FY23, supported by the normalisation of tax rates.

“Our FY23 estimate takes into account a 10 basis points (bps) NIM squeeze, a slight uptick in cost-to-income ratio to 45% (2022: 44%) and credit cost of 29 bps (minus three bps y-o-y),” it added.

Results from seven out of eight banks under RHB Research’s coverage were in line with both its and consensus expectations, while Bank Islam (M) Bhd was the only one that missed estimates, owing to disappointing performance in NIM and financing growth.

Post the reporting season, the research house trimmed sector earnings for FY23 and FY24 by about 1% per annum on softer NIM assumptions.

The research outfit, which maintained its “overweight” call on the banking sector, named Malayan Banking Bhd, Hong Leong and CIMB as its top picks for the sector.

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