Investment Highlights

• Banks’ 4Q23 core calendarised earnings declined by 2.6% QoQ with subdued total income, higher operating expenses (OPEX) and increased loan provisions. On QoQ basis, net income (NOII) of banks improved modestly by 1.8%, attributed to a higher non-interest income (NOII) of 6.7% while net interest income was marginally lower by 0.5% due to contraction in net interest margins (NIMs). The improvement in NOII of banks in 4Q23 was largely due to: i) RHB Bank’s higher IB-related and commercial banking fee income, stronger treasury income from gains in fx, derivatives, marked-to- market revaluation on securities, ii) Hong Leong Bank’s higher fee income, unrealised gains from revaluation of securities/derivatives, fx gains, and iii) CIMB Group’s increase in fees from consumer banking. Allowances for loan losses rose by 29.9% QoQ, leading to higher annualised net credit cost of 25bps in 4Q23 vs. 19bps in 3Q23. Meanwhile, OPEX climbed 6.2% QoQ mainly due to Maybank’s increase in personal cost, credit card fees and marketing expenses for year- end campaigns coupled with CIMB’s year-end accruals and restructuring expenses.

• 12M23 underlying earnings of banks grew 5.1% YoY, contributed by higher NOII and lower provisions, partially offset by weaker NII from NIM compression and higher overhead expenses (OPEX). NOII of banks increased 15.9% YoY for 12M23 driven by Maybank, CIMB and RHB Bank’s stronger investment and market-related income. Besides, CIMB’s gains from sale of NPLs in Indonesia contributed to the increase in NOII. OPEX of banks rose 5.2% YoY in 12M23, underpinned by increase in personal cost from wage adjustments of unionised employees under collective agreements and higher IT cost.

• 12M23 earnings of most banks under our coverage were within expectations. Results of all banks (Maybank, Public Bank, RHB, Hong Leong Bank, CIMB and Alliance Bank) were within our net profit estimates. Bank Islam’s results were slightly above our forecast due to lower than anticipated provisions and OPEX.

• Overall sector loan growth picked up pace to 7.7% YoY in 4Q23 vs. 5.7% YoY in 3Q23 . The larger capitalised banks’ (Maybank and Public Bank) domestic loans grew ahead of the industry’s 5.3% YoY in end-Dec 2023. In contrast, Alliance Bank’s loan grew strongly by 12.9% YoY, contributed by growth in loans from all segments, SME, commercial, corporate and consumer banking. Meanwhile, Bank Islam’s gross financing moderated to 3% YoY on a deliberate strategy to manage funding cost.

• The average NIM of banks contracted by 5bps QoQ to 2.08% in 4Q23 as funding cost remained elevated while some pressure on asset yield has been seen with more competitive lending rates on mortgages and commercial loans. Deposit competition persist in 4Q23. Nevertheless, the rates offered on FDs were not as high as that seen in 4Q22. Cost of funds are likely to remain elevated in near term until Fed Reserve’s pivot on interest rates. Average CASA ratio (based on our stock coverage) rose marginally to 35.1% in 4Q23 from 34.5% in 3Q23.

Source: AmInvest Research - 12 Mar 2024