The second half of 2022 was marked by ongoing monetary tightening by global central banks in respective fights against pronounced inflationary pressures, though domestic conditions continued to be strengthened by the transition to the endemic phase of COVID-19 management (and the full reopening of economic sectors which benefitted businesses). Markets were volatile nonetheless, with questions surrounding the outlook on global growth a constant distraction. Of note however is the fact that liquidity conditions in the banking system was largely unaffected by the withdrawal of regulatory flexibilities provided during the pandemic, and also from the recent turmoil in the US and Europe.

Business recoveries continued to remain uneven amid challenges emanating from higher input costs due to supply-side disruptions, geopolitical developments and a weaker Ringgit. Share of firms-at-risk inched higher to 25.1% (1H2022: 24.6%), as a result. That said, leading indicators from banks suggest that business-related impairments should remain relatively contained.

Improvements in income and labor market conditions helped sustain the overall health of households amid the elevated cost environment, with debt servicing abilities remaining healthy. Of some encouragement is Bank Negara Malaysia’s (BNM) revelation that past studies show household debt servicing being more affected by income and employment shocks rather than borrowing costs. In the lower-income segment of households, a larger share of loan accounts is on fixed rates which do not fluctuate with changes in the Overnight Policy Rate (OPR).

Short-term volatilities notwithstanding, full effects of last year’s rate normalization should be seen this year, with steady economic conditions ensuring asset quality remains relatively healthy. Competitive pressures, particularly on the deposit front, may weigh on margins however. While we do not foresee fundamental challenges threatening the sector, near- to medium term share price performances of banks will nevertheless be weighed by developments in the US and Europe, though we are not at similar risk. We retain our NEUTRAL view on the sector. For sector exposure, we like Maybank and CIMB Group.

Source: PublicInvest Research - 30 Mar 2023