Investment Highlights

• Bank Negara Malaysia (BNM) released the publication on its Financial Sector Blueprint (FSB) 2022–2026 in conjunction with the MyFintech Week 2022 event.

• The FSB focuses on 3 key broad themes:
  i) availability of all-inclusive, diversified financial options including digital solutions to customers and increasing the financial safety net;
  ii) expanding alternative financing for new, innovative enterprises coupled with sustaining Malaysia’s leadership as an international gateway for Islamic finance; and
  iii) to grow value-based intermediation (VBI) assets. More than 50.0% of new financing will be for green and transitioning activities.
• Among key targets to be achieved by 2026 are: i) narrowing the gap of Malaysia’s financial literacy scores and the average score of the OECD members; ii) increasing e-payment per capita at CAGR of >15.0%; iii) achieving an insurance/takaful penetration rate of 4.8–5.0% of GDP; iv) raising households’ take-up of micro insurance/microtakaful; and v) achieving faster, cheaper and more accessible cross-border payments (Exhibit 2).
• To achieve the key outcomes and targets, the following 5 strategic thrusts have been outlined:
  i) To fund Malaysia’s economic transformation;
  ii) Elevate the financial well-being of households and business;
  iii) Advance digitalization of financial sector;
  iv) Position the financial system to facilitate an orderly transition to a greener economy; and
  v) Advance value-based finance through Islamic finance leadership.

• One of the measures towards sustaining economic recovery is to provide continued access to financing. The focus will be on expanding the capacity of the credit guarantee providers, CGC and SJPP to support the financing needs of underserved segments. This will include providing guarantee coverage to support new loan borrowers and innovative firms in high-growth sectors.
  Mid-sized corporates will be supported in their investments to increase production capacity through credit guarantees. For borrowers with no prior credit history and have difficulties in obtaining financing, a wider range of data sources such as real-time payment information and analytical tools will be accessible to banks. This will support credit underwriting by providing predictive insights on the credit capacity and quality of borrowers.
• After the completion of restructuring, development financial institutions (DFIs) will play a role in bridging the gaps in financing to underserved segments and key economic sectors.
• Targeted assistance will continue to be accessible to borrowers requiring more time to recover from the pandemic. This includes working out financial plans with AKPK under URUS. To promote the recovery of businesses, blended finance solutions will also be available with banks partnering equity finance providers. Pursuant to the Budget 2022 announcement, BNM has made available a RM1bil business recapitalization facility to assist in the recovery of SMEs with high gearing and leverage from pandemic.

• Regulatory framework on the disposal and purchase of impaired loans will be enhanced with the current foreign equity limit for buyers of distressed loans removed. We view this as positive in potentially lowering the impaired loan ratios of banks and freeing up capital to support growth in businesses with higher returns.

• Additionally, the focus will be to expand alternative finance and the supporting infrastructures. Financial Institutions (FIs) will explore social finance where philanthropic capital could be blended with other sources of funds to lower financing cost and allow flexible repayment terms for households and micro entrepreneurs.

• The central bank will work closely with the government to review the taxation framework to encourage the growth of alternative finance. Trade-based financing instruments will be offered to allow vendors, including SMEs, to receive immediate payments for goods and services sold/rendered through sale of invoices to banks.

• The finance ecosystem for microenterprises will be reviewed and improved. Initiatives of microenterprises to move up the value chain will be supported.

• For insurance and takaful, solutions like trade credit protection and specialized products to manage risks in emerging growth areas such renewable energy projects will be offered. This will mitigate the risk of finance providers and firms.

• Financial inclusion with a higher take-up of financial services by underserved segments will also be a focus area. Consumers and businesses will be educated through financial literacy initiatives to make sound decisions. The role of agents and mobile banks will be strengthened to facilitate a wider access to financial services.

• The RENTAS access model will be reviewed to allow for a more diverse participation with the inclusion of non-bank payment service providers (PSPs) without compromising operations and security. Efforts will be stepped up to increase the efficiency of cross-border payments.

• No digital currencies have been issued as yet. Nevertheless, research and experimentation will be intensified on the use of digital currencies with the initial focus on wholesale payments (refer Exhibit 3 on the roadmap for Central Bank Digital Currency).

• Licensing of new digital insurers and takaful operators is targeted to be issued in 2023 after the finalization of the regulatory framework in 2022.

• For a more vibrant digital financial service landscape, industry-led strategies will be supported for digital payment adoption.

• Oversight of cyber security risk will be strengthened.

• To promote a smooth transitioning to green economy, climate risk will be integrated into banks’ internal functions and operations. Growth in green financing and collaboration with government agencies would support the gradual transition to a low-carbon economy in an orderly manner. The Climate Change and Principle based Taxonomy (CCPT) framework will be implemented to facilitate the assessment of climate-related risks and encourage the financing of environmentally sustainable economic activities. BNM has recently announced the availability of RM1bil of low carbon transition facility to encourage and support SMEs to adopt sustainable business practices.

• On Islamic finance, the focus will be to continue deepening Malaysia’s financial and capital markets. Social finance will be integrated as part of the ecosystem for Islamic finance. Efforts will be taken to widen the adoption of value-based finance across the financial sector.

• The December floods are not expected to materially impact banks. To assist microenterprises and SMEs impacted by the floods, BNM has raised the allocation for disaster relief facility from RM200mil to RM500mil.

• We maintain our OVERWEIGHT stance on the sector with top picks of CIMB (fair value RM6.20), RHB Bank (FV RM6.90) and Maybank (FV RM9.90). We like CIMB, RHB and Maybank due to the expected improvement in their core operating income. The interest rate uptrend will benefit underlying NIMs with lower provisions for loan losses with the tapering of new applications for financial assistance in Malaysia while that for overseas operations (Indonesia, Thailand and Singapore) are stabilizing. Also, we like CIMB due its undemanding valuation, potential ROE uplift from the impairment of goodwill and intangible assets coupled with the group’s initiatives on cost take-out to trim its opex. RHB Bank is seen to be of strong capital position with a CET1 ratio of 16.8% as well as trading at an attractive valuation of 0.7x P/BV for FY22.

Source: AmInvest Research - 25 Jan 2022