Investment Highlights

• Banks’ calendarised 1Q24 core earnings increased by 7.9% YoY with stronger total income partially offset by higher operating expenses (OPEX) and provisions for loan losses. Total income of banks rose by 12.1% YoY, attributed to an increase in net interest income (NII) of 3.3%, supported by loan expansion and higher non-interest income (NOII) of 31.2%. Improved NOII in 1Q24 was largely driven by: i) Maybank’s increase in core fees, income for treasury, markets and insurance business. Maybank reported strong treasury and markets income of RM1.5bil in 1Q24, underpinned by realised gains in bonds, fx sales and unrealised gains on FVTPL securities, which may not be repeated in the quarters ahead, and ii) CIMB Group’s stronger investment and market-related income coupled with gains from sale of NPLs in Indonesia. OPEX of banks climbed 12.8% YoY mainly due to Maybank’s increase in higher personnel, establishment (IT maintenance expenses and project contract staffs), administration and general expenses as well as CIMB Group’s increase in personnel and marketing cost from inflationary impacts and investments in technology.

• On QoQ basis, banks earnings grew modestly by 5.8%. This has been driven by stronger NII and NOII, lower provisions for loan losses, partially offset by an increase in OPEX. Allowances for loan impairments declined by 2.7% in 1Q24, contributed largely by lower provisions of Public Bank and RHB Bank coupled with higher writebacks in allowances for loan impairments of Hong Leong Bank.

• 1Q24 earnings of banks under our coverage were all within expectations. Results of all banks (Maybank, Public Bank, RHB, Hong Leong Bank, CIMB, Alliance Bank and Bank Islam) were within our net profit estimates.

• Overall sector loans continued to gain traction and registered a higher growth of 8.3% YoY in 1Q24 vs. 7.7% YoY in 4Q23. Except CIMB, which recorded a deceleration in loan growth from pricing up loan rates to protect NIM, all other banks posted higher loan growth in the quarter. Maybank recorded a strong loan growth of 11.2% YoY in 1Q24 from accelerated financing growth in Malaysia, Singapore and Indonesia. Meanwhile, Alliance Bank’s gross financing grew by a commendable 13.6% YoY, contributed by loan growth from all segments, SME, commercial, corporate and consumer banking.

• Average NIM improved marginally by 1bps to 2.09% in 1Q24 with lesser pressure on cost of funding, supported by lower repricing of FD rates from higher interest rates offered in earlier deposit campaigns as well as proactive liabilities management initiatives of banks. Deposit competition persist. Nevertheless, the rates offered on FDs in the recent campaigns have turned more rational.
  
  Even though, we have seen some mild improvements in the average NIM of banks, visibility on further expansion of banks’ interest margins in 2H24 remains low, as this will largely be dependent on market dynamics, including the timing of US Federal Reserve’s pivot on interest rates and magnitude of rate cuts. In the near term, cost of funds is expected remain elevated with interest rates kept high in developed markets. Uncertainties in the path of long-term interest rates of developed markets persist due to ongoing inflation variability. Average CASA ratio (based on our stock coverage) rose marginally to 35.9% in 1Q24 from 35.1% in 4Q23. Growth in CASA improved to 8.6% YoY in 1Q24 vs. 4.3% YoY in 4Q23.
   
• Loan impairment allowances in 1Q24 rose by 43% YoY, mainly driven by higher provisions of Maybank and RHB Bank. In 1Q24, loan provisions of Maybank rose by 29.9% YoY, attributed to the higher ECL of SME and auto loans in Malaysia coupled with lower writebacks for corporate loans in Malaysia and Singapore. Elsewhere, RHB Bank recorded normalised provision levels while Public Bank’s provisions rose in 1Q24 with the non-repeat of writebacks for retail operations and hire purchase segments.
• Annualised credit cost of banks was within expectations. In 1Q24, annualised net credit cost of banks under our coverage increased to 23bps vs. 18bps in 1Q23. Credit cost is already at the pre-pandemic level (2019: 23bps). Moving forward, limited sizeable releases of management overlays are expected. We continue to see limited room for further decline in banks’ net credit cost given that macroeconomic variability continues to warrant banks to remain prudent on provisions in 2024.

• Average GIL ratio for banks under our coverage continued to trend lower to 1.46% in 1Q24 from 1.49% in 4Q23 (Exhibit 14). The improvement was led by lower GIL ratios of CIMB and Alliance Bank. CIMB’s asset quality improved with a decline in GIL ratio to 2.55% in 1Q24 from 2.67% in 4Q23, contributed by improvement in asset quality ratios in Malaysia and Indonesia. Meanwhile, Alliance Bank’s GIL ratio decreased to 2.11% from 2.33% in the preceding quarter. This was supported by improvements in asset quality of commercial, corporate and consumer loans. For consumer loans, the delinquency ratios of Alliance Bank’s classic mortgage, personal financing and Alliance ONE Account (AOA) fell QoQ.

• No change to our calendarised sector core earnings growth for 2024 at 5.4%. However, our earnings estimate for 2025 have been raised slightly to 8.6% from 8.2% previously after adjusting our NIM assumptions higher for CIMB Group and lowering our credit cost estimate for Hong Leong Bank. (Exhibit 3).

• Downside risk: i) Weaker than expected global growth and unexpected further increase in funding cost, ii) inflation levels in developed countries remaining sticky, coupled with a slowdown of global economic growth which could lead to stagflation, impacting asset quality of banks, and a likely need for higher provisions for potential credit losses, and iii) high interest rates held for much longer in developed markets which will not result in much increase in valuations of bonds/securities portfolio and consequently resulting in a lower NOII.

• Maintain NEUTRAL on the sector and continue to be selective on stocks. We have BUYs on CIMB Group (FV: RM7.10/share), Hong Leong Bank (FV: RM24.10/share), RHB Bank (FV: RM6.10/share) and ABMB (FV: RM4.30/share). We continue to like CIMB as a stock to benefit from foreign liquidity flows as well as the expectation of stronger earnings growth in FY25F. The stock now trades at 1x FY24F P/BV with an attractive dividend yield of 5.7%. Operating income continues to improve and together with the optimisation of OPEX, the group’s CI ratio has been trending lower. Meanwhile, optimisation of the commercial loan portfolio in Indonesia and Singapore coupled with the run-down of loans to exit commercial lending biusiness in Thailand have improved the group’s asset quality and stabilised its credit cost. Also, the narrowing of losses in the digital businesses of CIMB Group will continue to raise its earnings and ROE ahead. We do not discount the possibility of an improvement in ROE going forward with the group continuing to optimise its capital.
  
  We like Hong Leong Bank for its resilient asset quality and undemanding valuation with the stock trading at an attractive P/BV of 1x for FY25F, below its 5-year historical average of 1.4x, despite a ROE of 10.9%, which is higher than most peers.
  
  On the low P/BV banking stock picks trading at 0.7x-0.8x P/BV, we like RHB Bank (FV: RM6.10/share) and Alliance Bank (FV: RM4.30/share). Valuation of RHB Bank remains compelling, trading at FY24F P/BV of 0.7x with an attractive dividend yield of 7.5%. Meanwhile, we continue to see value on Alliance Bank with the stock trading at a low FY25F P/BV of 0.8x with dividend yield of 6.1%. Alliance Bank’s OPEX is stabilising after the earlier front loading of expenses related to the group’s ACCELER8 2027 strategy. Potential lumpy recoveries will be an upside surprise to the group’s net credit cost guidance of 30 to 35bps for FY25F.

Source: AmInvest Research - 10 Jun 2024