Growth in net interest income a boon for banks

CGS-CIMB Research sees a year-on-year loan growth of around 4%.

PETALING JAYA: With the resumption of growth in net interest income, CGS-CIMB Research expects the core net profit of banks under its coverage to come in between RM6.5bil and RM6.6bil in the third quarter of 2023 (3Q23).

This represents a growth of 1% to 4% quarter-on-quarter (q-o-q) and 7% to 9% year-on-year (y-o-y).

“2Q23 was not all sunshine and rainbows for Malaysian banks despite the stellar y-o-y core net profit growth of 21.6% during the quarter, underpinned by the non-recurrence of Cukai Makmur taxation, a surge in non-interest income (NOII) and a drop in loan loss provisioning (LLP).

“In fact, banks suffered another round of contraction in net interest margin (NIM), with 2Q23 NIM down three basis points (bps) q-o-q and 19 bps y-o-y after a 22 bps q-o-q contraction in 1Q23,” the research firm said in a report.

For 3Q23, CGS-CIMB Research sees a y-o-y loan growth of around 4% and NOII to be close to 2Q23’s level of RM5.43bil.

“Meanwhile, we see room for banks to reduce their total LLPs in 3Q23 from the level of RM1.34bil in 2Q23, as the banking industry’s gross impaired loan ratio had stayed stable at 1.76% as at end-June and end-July 2023, while several banks could record management overlay write-backs,” it added.

As for overheads, the research firm expects it to remain high at RM7.4bil to 7.5bil in 3Q23, close to the levels in 3Q22 and the preceding quarter of 2Q23.

For credit costs, banks’ credit charge-off rate is expected to remain low with gross impaired loan ratio to be stable and the likelihood of certain levels of write-backs in management overlay.“We think banks’ loan growth would end 2023 at a rate closer to the lower-end of the 4% to 5% range we had projected, and improve to growth of around 5% in 2024, on the back of brighter economic outlook arising from various initiatives by the government to improve Malaysia’s economic growth.

“Gross impaired loan ratio would peak at between 1.8% and 2% and hover around these levels in 2024,” it added.

While some research firms have turned neutral on banks, CGS-CIMB Research reaffirmed its “overweight” rating, underpinned by the potential partial write-backs in management overlay.

It said capital management by several banks could also lead to an increase in dividend payout ratios and expansion in return on equity over the longer term. The research firm’s top sector pick is RHB Bank Bhd.

This is premised on the stock’s attractive valuation of 7.1 times 2024 price-to-earnings (versus 9.6 times for the sector) and dividend yield of 6.5% for 2023.

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