KUALA LUMPUR (June 8): After a sharper-than-expected squeeze in net interest margins (NIMs) in the first-quarter results season (1Q2023), RHB Research believes NIM pressure on the banking sector may have peaked, and a potential recovery cannot be ruled out, despite persisting macroeconomic uncertainties.

The research house's analysts David Chong and Nabil Thoo observed that banks had taken actions to prevent their NIMs from further erosion.

“Firstly, some semblance of rationality has returned, with banks cutting deposit rates post 1Q2023. Secondly, given the earlier anticipation of multiple rate hikes, banks pre-funded growth. We expect banks to allow these high-cost wholesale deposits to run off to protect NIMs."

Thirdly, they said, some banks are looking to shorten the duration of deposits, and the overnight policy rate hike in May should provide relief to NIM pressure.

Overall, they said most banks under coverage delivered 1Q2023 results that were within estimates, except for Bank Islam Malaysia Bhd, due to both its NIM and financing growth being disappointing.

“Post reporting season, we trim [our] sector 2023 and 2024 earnings [forecasts] by 1% per annum on softer net interest margin assumptions,” they noted.

For 2023, they anticipate the sector's net profit to grow 12% year-on-year, after taking a few factors into consideration, including 10 basis points (bps) of NIM squeeze, a slight uptick in the cost-to-income ratio to 45%, from 44% in 2022, and lower credit cost of 29 bps and normalisation of tax rates.

Despite the overall sector’s gross impaired loans stabilising at 1.62%, with loan loss coverage marginally decreasing to 117.5%, the analysts said banks remain watchful of loans exiting relief programmes, and relating to sectors such as construction and real estate.

“As loans continue to exit repayment assistance programmes, banks should see greater flexibility for the use of its overlays, which include redeployment/top-up of provision stock and/or write-backs. We expect better clarity in the coming quarters,” they added.

RHB Research maintained its “overweight” call for the banking sector, and indicated that the sector’s yields are attractive and valuations are low. The research outfit’s top picks are Malayan Banking Bhd (Maybank), Hong Leong Bank Bhd and CIMB Group Holdings Bhd.

The Financial Services Index has been in the doldrums since the US banking crisis in March. The index dropped 7.74% to 15,092.82 on Wednesday (June 7), from 16,359.29 on Jan 3 this year.