A respectable quarter where 1Q22 reporting season saw sector profit rising 8% QoQ (positive Jaws and lower loan loss provision) and stayed flat YoY (negative Jaws offset by lower allowance for impaired loans). Overall, there were 6 results that met expectations, 1 above, and 1 below. We still see CY21-23 sector profit growing at 2-year CAGR of 10.0%. Retain OVERWEIGHT and BUY calls include: Maybank, RHB, BIMB, Affin.

1Q22 results round-up. Not many surprises in this reporting season as 6 out 8 banks under our coverage chalked in financial results that met expectations (Affin, Alliance, CIMB, Maybank, Public, RHB), 1 above (AMMB saw lower-than-expected allowance for impaired loans and effective tax rate), and 1 below (BIMB was dragged by lower than-expected non-financing income).

QoQ. 1Q22 sector profit rose 9% given positive Jaws (total income +1% vs opex -2%) and lower loan loss provision (-43%). At the top, non-interest income (NOII) grew 7% (on the back of stronger investment-related gains) but it was slightly offset by the 3bp compression in net interest margin (NIM); the biggest gainer was CIMB (+82%), riding on the above QoQ trends. Notable underperformers were Affin (-32%, weighed down by weak total income and higher effective tax rate) and Alliance (-32%, hit by negative Jaws and higher bad loan allowances).

YoY. Despite negative Jaws (total income -3% vs opex +1%), sector earnings stayed flat, thanks to lower provision for impaired loans (-68%). The weak top-line was due to NIM slippage of 2bp and 19% decline in NOII (broad base softness across the board). Outliers with big profit rise were Affin (+2-fold, given ECL writeback of bonds), Alliance (+2-fold, fuelled by positive Jaws and lower loan loss provision), and AMMB (+9-fold, management overlay writebacks).

Other key trends. Both loans and deposits growth held steady at +5.3% YoY (4Q21: +5.0%) and +5.5% YoY (4Q21: +6.2%) respectively. Based on these two categories, top 3 fastest growing banks were Affin, BIMB, and Maybank (+5-23%). Separately, for asset quality, it was resilient as sector GIL ratio trended down 4bp QoQ to 1.73%.

Outlook. NIM is seen to expand sequentially, following May-22’s OPR hike. However, the magnitude could be capped by downward normalization of CASA mix. That said, loans growth is expected to chug along for now, considering economic recovery. On a separate note, GIL ratio is likely to creep upwards but we are not overly concerned as banks have already made heavy pre-emptive provisioning in FY20-21 to cushion this impact. Moreover, FY22 NCC assumption pencilled in by both us and consensus are still fairly elevated (above the normalized run-rate but below FY20-21’s level).

Forecast. Following the profit revision on AMMB and BIMB this reporting season, we are now projecting 2-year aggregate profit CAGR of 10.0% (CY21-23) for the sector.

Retain OVERWEIGHT. We believe the sector still has some legs to run as valuations continue to be undemanding and we are only at the cusp of an OPR hike upcycle with economic recovery, which benefit banks. However, there are pockets of concerns like acute CASA switching to FD (capping NIM expansion) and inflationary cost pressures. Thus, we employ a selective buying strategy. For large-sized banks, we like Maybank (TP: RM9.70) for its strong dividend yield. For mid-sized banks, RHB (TP: RM7.00) is favoured for its high CET1 ratio and attractive price-tag. For small-sized banks, BIMB (TP: RM3.30) and Affin (TP: RM2.35) are preferred; we like the former for its positive structural growth drivers and better asset quality while the latter has special dividends potential and strong financial metrics.

Source: Hong Leong Investment Bank Research - 7 Jun 2022