Investment Highlights

• We maintain NEUTRAL on the sector with a projected core earnings growth of 5.3% YoY in 2024 (2023: 5.1% YoY), lower than our FBMKLCI’s earnings growth projection of 15.3%. Our NEUTRAL stance is maintained, premised on limited earnings catalyst, uncertainties in major economies’ policy rate directions and ongoing geopolitical tensions. Besides, we continue see elevated interest rates keeping funding cost of banks high in 2H24 amidst limited rate cuts by key economies. Uncertainties in yield curve persist, impacting banks’ treasury and investment income. We anticipate a modest total income growth of 3.9% YoY in 2024, supported by higher net interest (NII) and Islamic banking income. ROE of the sector is forecasted to be 10.3% in 2024 on par to 2023.

• Softer NII in 2H24 after an improved NIM in 1H24 underpinned by the completion in repricing of matured FDs to lower rates from higher promotional rates in late-2022 and early-2023. In 2024, we continue to see a mid-single digit NII growth driven by a modest growth in loans and lower NIM compression of 4bps in 2024 vs. 17bps in 2023.

• Non-interest income (NOII) is likely to moderate in 2H24 due to a drop in investment and treasury income with a lower marked-to-market and realised gains from securities portfolio. This is due to the push back or delays in US federal funds rate (FFR) cuts. The recent concluded Federal Open Market Committee (FOMC) meeting in June 2024 saw the benchmark interest rate maintained at 5.25%-5.50% with the projected cuts on FFR in 2024 trimmed to one (25bs) compared to 3 in Mar 2024. This is in contrast with market expectations of 2 rate cuts (Sept and Dec 2024) in US based on fed fund futures and overnight index swaps. Our economist projects the 10-year MGS yield to be 3.85% in 2H24 compared to 3.73% as of end 2023.

• We maintain our expectation for the Malaysian banking industry to register a loan growth of 4%–5% in 2024 supported by a projected GDP growth to 4.5% in 2024 vs. 4% in 2023. We expect domestic economic growth in 2H24 to be supported by steady unemployment rate, recovery in tourist arrivals and exports from tech cycle rebound. Our economics team expects global semiconductor growth to be in the low double digits in 2H24. Domestic banking system’s loan grew by 5.8% YoY in May 2024. In 2H24, the growth rate is expected to taper off as banks are likely to be disciplined in loan pricing to protect interest margins.

• OPR is expected to stay pat at 3.0% in 2H24. Anticipate 2H24 NIM to be either stable or up to an early single digit compression at most. Deposit competition persists with ongoing campaigns by banks and attractive rates offered on savings deposits by digital banks. Nevertheless, funding cost pressure is seen abating with FD rates continuing to be more rational between 3.6%-3.8% for tenures of 6-12 month compared to the rates in late-2022. Domestic banking system’s CASA ratio stood at 29.6%, normalising but remain above the pre-pandemic level of 26.5% (Dec 2019).

• We estimate a cost-to-income (CI) ratio of 45.3% on average for banks in 2024 vs. 45.8% in 2023.

• Asset quality to remain stable in 2H24 with slight upticks in loan impairments. Net credit cost is projected to be flat at 22bps in 2024, close to the pre-pandemic (2019) level of 23bps. With macro uncertainties, banks are expected to remain prudent and continue to hold on to their remaining preemptive provision buffers. May 2024 saw a stable GIL ratio of 1.6%. In 2H2024, we do not discount the likelihood of upticks in impaired loans from the restructuring loans of lower income household borrowers and smaller SMEs impacted by cost pressures.

Source: AmInvest Research - 17 Jul 2024