AmInvest Research Reports

Banking - Valuation remains inexpensive; stable NIM and credit cost

Publish date: Wed, 04 Jan 2023, 10:33 AM
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Investment Highlights

  • We maintain our OVERWEIGHT stance on the sector with a projected core earnings growth of 8.4% YoY in 2023 compared to 13.8% YoY in 2022. We anticipate an improvement in the underlying income of banks supported by higher net interest income (NII) and lower provisions for loan impairments. 2023 will not see a repeat of Cukai Makmur as in 2022. We expect the sector’s ROE to be marginally higher at 11.2% in 2023 vs. 10.8% in 2022.
  • Modest growth in NII for 2023. The growth in NII will be underpinned by higher loan volume and stable net interest margin (NIM).
  • Flattish non-interest income (NOII). We expect only a marginal growth in NOII with the improvement in investment and trading income, offset by softer commission, service charges and fees in 2023. With the US potentially reaching the end of the rate hike cycle in 1Q2023 coupled with tapering of the quantum of Fed rate hikes in the near term, the 10-year MGS yield is seen trending downwards. This will be positive for banks’ treasury income with mark-to-market losses seen in 2022 and will not be likely repeated in 2023.
  • Slower pace of loan growth for the Malaysian banking industry of 4–5% in 2023. As at end of Nov 2022, the banking industry’s loans expanded by 5.5% YoY, and we expect to end 2022 with a growth of 5-6%. This is premised on a GDP growth expectation of 9% for 2022. Looking ahead in 2023, we project the banking sector’s loans to slow down to a growth of 4-5% which will be equivalent to our projected GDP growth of 4.5% for the year.
  • Smaller interest rate hike in 2023. 2022 witnessed 4 interest hikes cumulating to 100bps to increase the OPR from 1.75% to 2.75%. In 2023, our economics team expects only 1 rate hike with the OPR further increased by 25bps at the next MPC meeting on 19 January, bringing the benchmark interest rate to 3.0% (pre-pandemic level).
  • Stable NIM anticipated for 2023. We expect a lower NIM expansion of just 2bps for banks in 2023 compared to an uplift of 6bps on average in 2022. This is premised on the lower quantum of OPR hikes expected in 2023 than 2022. Generally, lending rates as a result of hikes in benchmark interest rates will rise faster than cost of funds by 3-6 months. Hence, for next year, banks are expected to benefit from the flowthrough effect of the 25bps OPR hike on 3 November 2022, as well as the impact of another 25bps rate increase in January 2023. We expect CASA growth of banks to remain modest in 2023.
  • Intensity of deposit competition is likely to ease after the end of 2022. Of late, deposit competition has been more intense with banks offering higher interest rates on FDs through various campaigns. The higher interests have seen some shifts in deposits (CASA) towards FDs. Nevertheless, the intensity of the competition is likely to ease after the end of 2022 as we see loan growth of banks tapering in 2023 amid the slowdown in global economy. This should put less pressure on banks’ funding cost ahead.
  • Growth of operating expenses projected at 6.1% YoY due to the need for investments to accelerate digitisation and technology modernisation. Based on higher total income, we estimate a cost-to-income (CI) ratio of 44% on average for banks in 2023.
  • Slight improvement in credit cost expected with no significant increase in allowances for loan impairments in 2023. In 2023, we project a lower credit cost of 28bps for the sector (2022: 32bps). We do not foresee any significant increase in allowances for expected credit losses as banks are anticipated to carry over their existing stock of preemptive provisions built up since 2020 and 2021 to 2023, in addition to regulatory reserves. Based on the stocks under our coverage, banks hold provision buffers of RM8.6bil in addition to regulatory reserves totaling RM4.4bil. These provision buffers are envisaged to be able to mitigate the impact of economic headwinds on their asset quality. 
    With loans progressively exiting the repayment assistance coupled with the end of observation period (generally 6 months), management overlays are gradually expected to be released. However, due to the macro headwinds, we expect banks to raise provisions based on revisions to macroeconomic factors (MEFs). This will maintain a stable stock of preemptive provisions.
  • The sector’s GIL ratio is expected to inch higher moving forward with the continued decline in loans under repayment assistance. In Nov 2022, GIL ratio for the sector was 1.8%. Owing to expectations of upticks in loan impairments after the expiry of financial assistance programmes, we project the sector’s GIL ratio to be <2.0% for 2022 and <2.5% for 2023.
  • Key risks for the sector: i) Any prolonged or worsening of supply chain disruptions, which will impact the pace of economic recovery and consequently affect our estimates for earnings growth of banks; and ii) inflationary pressures rising again, coupled with a slowdown of global economic growth which could lead to stagflation. Stagflation will result in higher unemployment rate and this, coupled with higher inflation rate, could pose downside risk to the asset quality ratio of banks, resulting in a likely need to increase provisions for potential credit losses.
  • Banks are on track to meet their key ESG commitments which includes mobilising sustainable financing. Maybank has achieved RM29bil in sustainable finance, and is well on track to meet its target of RM50bil by 2025. Meanwhile, CIMB has already achieved their target for sustainable financing of RM30bil by 2024 in 1H2022. The group has recently raised the target to RM60bil. As at the end of 1H2022, Public Bank has mobilised RM20bil in energy efficient vehicle (EEV) financing and more than RM1bil in affordable home financing.
  • Key considerations for downgrading the sector to Neutral: i) stronger than expected pressure in funding cost leading to contraction in the NIMs of banks and ii) more severe recessions in developed markets than just a projected soft landing, which will impact the GDP growth of the local economy and require more provisions of potential loan impairments to be raised.
  • Sector valuation is inexpensive at 1x FY23F PB/V. This compares to the average P/BV of 1.1x for banks in Singapore and 1.8x for Indonesian banks.
  • Our top BUYs are on RHB Bank (FV: RM7.40/share), CIMB Group (FV: RM6.70/share) and Bank Islam (FV: RM3.20/share). On CIMB, our BUY call is premised on the stock’s attractive valuation, trading at 0.9x FY23F PB/V. Asset quality has improved with lower provisions while cost optimisation and recalibration of its commercial banking business in Indonesia and Thailand are showing results with improved performance. RHB Bank is another of our top picks for banks due to its valuation which remains undemanding, trading at an attractive FY23F PB/V of 0.8x and its strong capital position among peers with a CET1 ratio of 16.8%. We like Bank Islam due to an attractive valuation of FY23F P/BV of 0.8x with a decent dividend yield of 6%. It remains one of the pure full-fledged financial services providers listed on the exchange.


Source: AmInvest Research - 4 Jan 2023

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