Investment Highlights

• Banks’ 3M22 core calendarised earnings grew by 7% YoY after stripping out the impact of Cukai Makmur and CIMB Group’s exceptional item net of tax and minority interest (MI) of RM45mil and modification loss. The stronger 3M22 earnings were driven by higher total income supported by an increase in net interest income (NII), controlled operating expenses (opex) and significant decrease in provisions.

• Results of banks were mostly within expectations. The results of Maybank, Public Bank, RHB, Hong Leong, Alliance Bank were within expectations. Bank Islam reported net earnings that were slightly below our expectation due to lower-than-expected non-fund based income. Meanwhile, AMMB’s earnings were above consensus estimates as a result of its net write-back in provisions with the reversal of some management overlays.

• NII for banks rose in 1Q22 underpinned by an acceleration in loan growth while non-interest income (NOII) declined YoY largely due to lower investment, trading and market-related fees 1Q22 saw a decline of NOII for the sector by 34% YoY. The drop was contributed by lower investment and trading income, higher marked-to-market losses on financial assets and investments due to higher bond yield coupled with a decline in IB-related and stockbroking income. Most banks are anticipated to continue to hold on to the conservative provisions (overlays) booked in earlier until the end of 2022. Any significant write-back in overlays will only be likely in 2023. Provisions for loan losses for 1Q22 declined by 67% YoY largely contributed by lower impairment loan allowances of Maybank, CIMB, Public Bank and RHB. In contrast, AMMB recorded a net write-back in provisions of RM51mil in 1Q22 with reversals of management overlays offsetting the specific impairment charge for certain oil & gas exposures of RM325mil.

• The sector's underlying net interest margin (NIM) slipped 6bps YoY to an average of 2.25% in 1Q22 attributed to slower CASA growth and higher intensity of deposit competition. Higher deposit rates were offered in campaigns to lock in FDs on longer tenures in view of expectations of higher interest rates. The impact of mod loss from financial assistance programmes in 1Q22 was minimal. CASA growth was slower in 1Q22. The sector’s average CASA growth decelerated to 8.8% YoY in 1Q22 vs. 25% YoY in 1Q21. Nevertheless, the average CASA ratio (based on our stock coverage) remained stable at 38%. We have imputed into our earnings estimates for banks 50bps in rate hikes (including 11 May 2022’s 25bp) for 2022. In 2H2022, we expect another hike of 25bps in 2H2022 raising the OPR from 2.00 to 2.25% which could come in as early as the next MPC meeting on 6 July 2022.

Source: AmInvest Research - 8 Jun 2022