KUALA LUMPUR (March 6): Banking-sector analysts said the latest quarterly earnings reporting for the October to December quarter (4Q2022) came in mostly within expectations.

Hong Leong Investment Bank Research analyst Chan Jit Hoong said the banking sector had delivered commendable quarterly results for 4Q2022, where the sector saw profit up 5% quarter-on-quarter due to lower loan provision.

On a yearly basis, the sector’s earnings growth was even more impressive, growing at a rate of 20%, underpinned by smaller impaired loan allowances and positive Jaws (banking jargon for income growth exceeding expense growth), Chan said in a research note on Monday (March 6).

“There were little surprises this reporting season, where six out of eight banks under our coverage posted profit within expectations (Affin Bank Bhd, Alliance Bank Malaysia Bhd, BIMB [Bank Islam Malaysia Bhd), CIMB Group Holdings Bhd, Maybank [Malayan Banking Bhd], and RHB Bank Bhd), and [there's] only two beats — AMMB [Holdings Bhd which] booked in stronger-than-anticipated total income growth, while Public Bank Bhd saw lower-than-expected loan loss provision," he commented.

Moving forward, Chan is projecting the sector profit to grow at a two-year compound annual growth rate of 8.6% from 2022 to 2024.

NIMs to be under pressure due to rising cost of funds, while GIL to rise amid economic slowdown 

Nonetheless, Chan forecast banks may now have to grapple with possibly steeper cost of funds, smaller non-interest income, and loan growth this year.

He expects sequential net interest margins (NIMs) to shrink given the repricing of matured deposits, current account saving accounts being utilised and substituted to fixed deposits (FDs), along with still stiff price competition for FDs.

Also, banks’ loan growth would moderate due to a softer domestic macro environment, he explained.

“Besides, the GIL (gross impaired loan) ratio is likely to climb, but we are not overly concerned, as we believe banks are better equipped versus prior slumps. The large pre-emptive provision built up in FY2020-22 (financial years 2020 to 2022) to combat Covid-19 pandemic woes and latency in credit loss from OPR (overnight policy rate) hikes act as robust buffer to cushion for any short-term asset quality weakness,” Chan added.

CGS-CIMB also sees the banking sector posting slower loan growth this year, with a growth rate of between 4% to 5%, compared with 5.7% in 2022, following the industry’s loan growth, which eased further from 5.7% year-on-year (y-o-y) at end-December 2022 to 4.9% y-o-y at end-January 2023 amid weak growth in both household and business loans.

Also, weak leading loan indicators such as loan applications in January this year fell 13.2% y-o-y, and approvals by 6.1% y-o-y, cementing the research house’s weaker loan growth forecast for the sector.

For banks’ GIL ratio, CGS-CIMB projected it to rise to 2% at end-December 2023, from 1.72% at end-December 2022, given the potential increase in credit risks from the economic slowdown.

In addition, CGS-CIMB warned that heightened inflation and interest rate hikes could be detrimental to banks’ loan growth and asset quality.

"We note a pickup in deposit competition within the banking industry, with most banks running campaigns to offer attractive rates for FDs since last year. Any protracted deposit competition will lead to further increase in banks’ cost of funds, and dilute the positive impact of the hikes in the OPR," the research house added. 

Key potential downside risks to the sector include weaker-than-expected economic growth in 2023 (especially with potential risks from possible recessions in the US and Europe) as this could cause banks to register higher-than-expected loan loss provisioning and softer loan growth, CGS-CIMB further added. 

Banks’ dividend yield is attractive at around 5%

On a positive note, HLIB’s Chan said the banking sector has a balanced risk-reward profile as the undemanding valuation and decent dividend yield of 5% are solaces that would provide downside support to share prices.

Chan has "buy" calls on four banks, namely RHB Bank (with a target price of RM6.60) , AMMB (RM4.35), Alliance Bank (RM4.15) and BIMB (RM3).

“The quartet share a common trait of inexpensive valuations, and recent price weakness turned their risk-reward profile to become more favourable than the other banks we follow,” Chan said.  

For the banking sector as a whole, Chan maintained his “neutral” call.

CGS-CIMB, which concurred that the banking sector’s dividend yield is attractive at 5.1% in 2023, said the sector picks are RHB Bank, Hong Leong Bank Bhd nd Public Bank.

Overall, CGS-CIMB reaffirmed its “overweight” call on banks, predicated on the potential rerating catalysts of an expected recovery in non-interest income growth in 2023 and potential write-backs of management overlay (which would reduce banks’ loan loss provisioning).

Most banks' share prices were traded lower on Monday.

At noon break, RHB Bank was among the top losers, after the stock fell five sen or 0.87% to RM5.67 a share. 

Shares price weakness also seen in other banks, such as Maybank which fell two sen or 0.23% to RM8.69, Public Bank dropped one sen or 0.24% to RM4.13, Hong Leong Financial Group Bhd declined four sen or 0.22% to RM18.32, and AMMB also was down one sen or 0.25% to RM3.96. 

CIMB's share price was unchanged at RM5.59, while Hong Leong Bank was flat at RM20.58. 

BIMB was up two sen or 0.9% to RM2.23, and Alliance Bank rose three sen or 0.87% to RM3.49.