MIDF Research said balance sheets of banks are expected to stay resilient this year.
PETALING JAYA: The banking sector in Malaysia has alternated towards a more cautious outlook after its latest results season, according to MIDF Research.
In its Awaiting The Cuts 2QCY24 Market Outlook report, the research firm said the switch to a more prudent stance was more noticeable from its net interest margin (NIM) whereby most banks had recorded a stable-to-slight contraction due to more competitive loan yields.
It noted, however, that not all banks felt the same as some had a more optimistic view on this.
“This is coupled with a more moderate non-interest income outlook, as last year’s exceptional non-fee gains are unlikely to be repeated,” it said.
Another key factor for the outlook included its not-as-sharp growth for its operating expenses compared to last year due to high base effects.
“As costs remain high, most banks are positing that cost-to-income ratio will be higher than normal to cater to tech spend,” it said.
MIDF Research said notably, the balance sheets of banks are expected to stay resilient this year, more so in the second half of 2024, as there may be an increase in business loans from major infrastructure projects.
“While most banks have voiced their intention to slow down on residential mortgage growth given narrowing yields, retail leading indicators remain resilient until today,” the research house said.
In addition to that, in the last quarter, every bank registered either a strong deposit growth or a current account, savings account (CASA) growth, in particular banks that prioritised NIM optimisation.
“The deposit outlook is a lot more optimistic – signs point to retail CASA having already reached its floor and a rebound may be in the works,” it said.
Meanwhile, MIDF Research opined that asset quality is not a concern any longer, thus expecting to see better and normalised credit costs, with recovery and writebacks providing a light positive upside.
“The dividend yield outlook remains very strong, with common equity tier-1 ratio still highly elevated across the industry.
“Some banks, however, are a bit more cautious with the upcoming Basel III implementation next year and have reverted to dividend reinvestment plans to offer some buffer for the change,” the research firm said.
Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision.
In line with that, MIDF Research said it will maintain its “neutral” call on the sector as it believes it has been mostly priced in by now, with fewer re-rating drivers ahead in the future.
“We remain optimistic on balance sheet growth prospects although we are more mixed on the profitability outlook,” it said.
For its top picks, MIDF Research chose Hong Leong Bank Bhd
, which has a “buy” call with a target price of RM21.38, as well as Alliance Bank Malaysia Bhd, also with a “buy” call and a target price of RM4.09.
