Optimistic outlook for banks

CGSI Research is anticipating Malaysian banks to record a total net profit of RM8.6bil to RM8.7bil in 2Q24.

PETALING JAYA: CGS International (CGSI) Research is reaffirming its confidence in the banking industry’s outlook, given the potential rerating catalysts of write-backs in management overlay and an improved outlook for net interest margins (NIM) and non-interest income (NOII).

It reported that banks had posted a decent 7.4% year-on-year (y-o-y) net profit growth in the first quarter of 2024 (1Q24), primarily driven by a 27.8% y-o-y rise in NOII.

In a note to clients yesterday, it said: “We saw bright spots at the topline in 1Q24 which included a turnaround in NOII growth to an expansion of 2.8% y-o-y in 1Q24 from a 9.1% y-o-y decline in 4Q23, as well as 14.8% y-o-y growth in fee income.”

Notably, the research unit is anticipating Malaysian banks to record a total net profit of RM8.6bil to RM8.7bil in 2Q24, slightly lower than the RM8.75bil posted in the preceding quarter.

It pointed out this is based on its view that the high NOII – lifted by robust investment income – would not be sustainable but the possible quarterly decline in NOII could be partly offset by continuous expansion in net interest income (NII).

“In view of the above, we forecast banks would register a net profit growth of 5% to 6% y-o-y in 2Q24,” it added.

Having predicted that strong investment income from 1Q24 may not be sustained moving into subsequent quarters, CGSI Research nonetheless believes that high income fees from 1Q24 could persist, given the sturdy sentiment around the equity market and positive economic growth.

Meanwhile, looking forward on loans, the research house noted that the banking sector’s loan growth moderated from 0.6% month-on-month (m-o-m) in March to 0.1% in April, translating into an annualised projected growth rate of 4.2% for 2024.

“As such, we maintain our projected loan growth of 4% to 5% for the banking industry in 2024, based on our forecast growth of 5% to 6% for household loans and 4% to 5% for business loans,” it said.

With that prediction, the research house sees NII for banks to continue expanding by around 1% quarter-on-quarter (q-o-q) in 2Q24, on the back of continuous expansion in the industry’s loan base and a stable NIM.

Premised on this, it is forecasting banks’ NII to grow by a decent rate of 3% to 4% y-o-y in 2Q24, better than the 2.8% y-o-y expansion in the previous three months.

With healthy economic growth as the background, CGSI Research does not see any systemic risks for banks’ asset qualities in this year, as it expects the gross impaired loan (GIL) ratio to hover around 1.6% at the end of the year.

“Banks’ loan loss coverage would somewhat decline in the next few quarters as some banks would write back parts of their management overlay, in our view. However, this could be partly offset by the potential decline in their GILs,” it said.

Estimating loan loss coverage to be significantly higher than 100% if collaterals were included, CGSI Research commented that before lockdowns, the banking industry’s loan loss coverage hovered between 83% and 94% in 2019, but the ratio has risen over the past few years.

It said this was due to the build-up of management overlay provided by banks to cushion for the credit risks mainly from the lockdowns. “We think that it is reasonable for banks’ loan loss coverage to drop down to the pre-lockdown levels, as banks will continue to unwind parts of their management overlay,” it added.

Retaining its “overweight” call on the sector, which is equivalent to a “buy” call, the research outfit listed CIMB Group Holdings Bhd, Hong Leong Bank Bhd and Public Bank Bhd as its top picks.

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