Banking sector poised for higher earnings ahead

Kenanga Research said most banks have seen the worst being over with regard to net interest margin erosion.

PETALING JAYA: Earnings of the banking sector in the third quarter of 2023 (3Q23) came in largely within expectations and banks may compete on the financing front to gain share going forward.

In its review of the banking sector 3Q23 results, Kenanga Research said most banks have seen the worst being over with regards to net interest margin (NIM) erosion on a quarter-on-quarter (q-o-q) level, instigated by intense competition for deposits since December 2022.

“Year-on-year (y-o-y) loan growth still appears encouraging, but certain banks may see hurdles in building their books on a q-o-q basis which may indicate that competition has shifted towards financing products.

“Unanimously, banks continued to see rising personnel costs stemming from the recently reviewed union collective agreements,” said Kenanga Research in a report yesterday.

The research firm also noted the diminishing presence from non-key players.

“Based on 3Q23’s market breakdown, the 10 listed local banks continued to build a stronger foothold at the expense of the non-listed ones at a combined market share of 81.8%.

“We reckon this is owing to foreign banks consciously diverting focus back to their respective home markets.”

It said Malayan Banking Bhd (Maybank) continued to hold the top spot (17.8%) but at a narrower gap against Public Bank Bhd, which is in second place (17.6%).

This could be due to Public Bank’s prominent retail portfolio which benefits from the rising demand for affordable homes, while Maybank has a more diverse mix that includes corporate books.

Aside from Public Bank, the research firm gathered that Hong Leong Bank Bhd and Affin Bank Bhd were also notable gainers in market share at 8.1% and 3.1%, respectively, which are likely to come from foreign banks’ customers.

“In the coming quarters, we believe the banks will report better earnings with some banks already seeing NIM expansion as they had weathered through the toughest product margin conditions.

“While this may not fully translate in the upcoming 4Q23 as seasonal deposits competition is bound to occur, there is still more reason to anticipate that 2024 would hold up better than 2023’s reporting so far,” said Kenanga Research.

It added that non-interest income could be less buoyant as the market and investment landscape seems to err towards stability, offering fewer opportunities for volatile trading.

Banks would have to depend on higher fees to make up for this potential shortfall.

Where asset quality is concerned, Kenanga Research noted the risks appear to be well contained with some of the larger banks still holding on to their pre-emptive provisions tightly, while some smaller ones are already writing back provisions which are viewed to be in excess.

“Barring unforeseen macro developments, we may see better if not stable credit cost readings in the near term as more write-backs could counteract pending impairments,” said Kenanga Research, which maintains an “overweight” rating on the banking sector post-3Q23 earnings.

It is of the view that the overnight policy rate will be flattish at 3% until end-2024, which could provide stability for the industry as well as banks in the near term.

Additionally, dividend yields of 6% to 7% could still be offered by certain banks with a sustainable return on equity.