Investment Highlights

• Banks’ 12M21 core calendarised earnings grew by 31.0% YoY. This was after stripping out CIMB Group’s RM73mil transformation/restructuring cost, intangible asset (IA) write-off coupled with its accelerated amortization of RM324mil, RM1.15bil revaluation gains from the deconsolidation of TNG Digital (TNGD), RM1.2bil goodwill impairment for Thailand, RM74mil exceptional items and RM118mil deferred tax asset on Cukai Makmur in 4Q21. The stronger 12M21 earnings were driven by higher total income supported by an increase in net fund-based income and lower provisions.
• Results of banks mixed but mostly within expectations. The results of most banks (Maybank, Public Bank, RHB and Hong Leong) were within expectations. Alliance Bank’s core earnings were above our estimates on lower-than-anticipated provisions while that of CIMB and Bank Islam were below expectations. For CIMB, it was due to higher-than-projected operating expenses (opex) and provisions. Meanwhile, on Bank Islam, earnings were lower than expected attributed to softer net income and higher opex.
• Net interest income (NII) for banks rose for 12M21 underpinned by higher interest margin (NIM) and acceleration in loan growth, particularly towards the end of 2021 with the reopening of the economy. 12M21 saw lower funding cost for banks from deposits’ optimisation and repricing after OPR cuts. As for non-interest income (NOII), it declined by 7.7% YoY for 12M21. The drop was due to lower investment and trading income, higher marked-to-market losses on financial assets and investments, and a decline in FX and stockbroking income. Most banks continued to hold on to the conservative provisions (overlays) booked in earlier. Maybank reported some writebacks in overlays in 4Q21 with an improvement in the trend of loans under repayment assistance. Provisions for loan losses for 12M21 declined by 36.8 YoY largely contributed by the lower impairment loan allowances of Maybank, CIMB, RHB and Hong Leong Bank.

• The sector's underlying net interest margin (NIM) was stable QoQ at 2.27% in 4Q21. The impact of mod loss from the Pemulih moratorium was milder in 4Q21 compared to 3Q21. The sector’s average CASA growth accelerated to 12.3% YoY in 4Q21 vs. 10.5% YoY in 3Q21. This led to a higher average CASA ratio (based on our stock coverage) of 37.5% in 4Q21 vs. 37.2% in 3Q21. We continue to expect the OPR to be sustained at 1.75% until 1H2022 with the likelihood of 1–2 rate hikes (25bps each) in 2H2022.

• Sector overall loan growth for 4Q21 accelerated to 5.0% YoY (3Q21: 3.7% YoY). Maybank’s loans growth gained traction to register a 5.7% YoY growth in 4Q21 supported by community financial services’ (CFS) loans in Malaysia and an expansion of CFS and global banking (GB) loans in Singapore. CIMB’s gross loans grew at a faster rate of 3.3% YoY supported by growth in consumer, commercial and wholesale banking loans. Meanwhile, RHB’s loans expanded by 6.7% YoY driven by mortgages, HP, SME, commercial loans and growth of Singapore’s loans. Domestic loans of RHB grew 4.8% YoY slightly outpacing the industry’s 4.5% YoY. Jan 2022 saw stronger loans growth domestically for the banking sector to 4.7% YoY underpinned by a pick-up in the pace of household loans and stronger momentum for working capital financing.

• The percentages of bank loans that were under repayment assistance (RA) declined with a high percentage of borrowers for the expired RA loans in January 2022 making repayments. Applications for URUS financial assistance has been extended to end-March 2022. Nevertheless, the take-up rate for URUS stayed low.

• Uptick in GIL ratio for the sector (based on stocks under our coverage) to 1.75% (3Q21: 1.70%). In 4Q21, credit cost for the sector declined to 0.35% (3Q21: 0.56%) For 12M21, credit cost decreased to 0.66% vs. 12M20’s 1.09%. We continue to see provisions tapering based on the declining trend of outstanding RA loans and the improving asset quality outlook for banks.

• The sector's calendarised core earnings growth for 2022 is now revised to 9.6% from 10.0% largely after adjusting our NIM and credit cost assumptions for banks. On reported net profit with the additional taxes from Cukai Makmur, earnings growth for banks in 2022 will be flattish at 0.8%.

• Retain our OVERWEIGHT stance on the sector with the interest rate uptrend benefitting interest income of banks with lower provisions ahead supported by the potential reversals of management overlays from an improving trend of loans under RA. Also, with improved earnings visibility, we are seeing normalizing dividend payouts by banks. Our top BUYs are RHB Bank (fair value RM7.10/share), Maybank (RM10.00/share) and CIMB Group (RM6.50/share). On the mid-cap banks, we like Alliance Bank (fair value RM4.20/share) and Bank Islam (fair value: RM3.70/share).

OTHER OBSERVATIONS IN 4Q21

i. The sector’s net LD ratio inched higher to 90.0% (3Q21: 89.3%) attributed to stronger loan growth in 4Q21; and

ii. Sector loan loss cover (including regulatory reserves) in 4Q21 climbed slightly to 190.3% from 188.3% in 3Q21. Public Bank set aside additional management overlays of RM300mil in 4Q21.

Source: AmInvest Research - 9 Mar 2022