Investment Highlights

• Banks’ 2Q23 core calendarised earnings increased marginally by 1% QoQ due to a net write back in loan impairment allowances of RHB Bank, lower provisions of Alliance Bank and improvement in net income margin (NIM) of Bank Islam. RHB Bank reported lower provisions from a net write back of RM85.5mil which offset weaker fundbased income on the back of higher funding cost. Meanwhile, Alliance Bank recorded a low net credit cost of RM34.7mil from lower BAU expected credit loss (ECL) charge of RM83mil, offset by reversal of ECL overlays of RM48.3mil. Bank Islam chalked up an improvement in NIM to 2.11% in 2Q23, up by 5bps QoQ owing to proactive management of funding cost which consequently led to improvement in the group’s net fund-based income.

• In 6M23 underlying earnings of banks rose by 7% YoY contributed by higher non-interest income (NOII) and lower provisions, partially offset by weaker net interest income (NII) from compression in NIM and higher overhead expenses (OPEX). The overall improvement to NOII of banks by 18.7% YoY was driven by Maybank’s stronger treasury and markets income, led by investment, trading income and unrealised marked-to-market gains from securities. Also, CIMB’s NOII rose due to stronger treasury, markets, FX income and gains from the sale of impaired loans in Indonesia and Thailand. OPEX of banks climbed by 6.3% YoY from an increase in personal cost due to collective agreement adjustments and higher IT expenses.

• 6M23 earnings of banks under our coverage were all within expectations. The results of all banks (Maybank, Public Bank, RHB, Hong Leong Bank, CIMB, Alliance Bank and Bank Islam) were within our net profit estimates.

• Sector overall loan growth picked up pace slightly in 2Q23 with a higher growth rate of 6.3% YoY (1Q23: 6.2% YoY) (Exhibit 4). Most banks’ domestic loans outpaced industry growth of 4.4% YoY as at end of June 2023.

• The underlying NIMs of banks compressed by 5bps on average in 2Q23. This was much lower than the compression of 30bps on average in 1Q23. Pressure on NIM is easing with a stable outlook on interest margin in 2H2023. With the gradual expiry of expensive FDs from earlier deposit campaigns, we expect an improvement to banks’ NIM in 2H2023. The average CASA ratio (based on our stock coverage) slid marginally to 34% in 2Q23 from 34.7% in 1Q23. CASA continues to contract with the shift in deposits towards FDs after the increase in interest rates since last year (OPR hikes by 125bps to 3%).

Source: AmInvest Research - 11 Sept 2023