KLFIN is poise to finish 1H22 with a 3% return. In 2H22, we see better operating performance and FY22 sector profit is projected to expand 3.7% (FY21: +32.5%), primarily on broader NIM and lower NCC. Also, OPR hike will benefit banks and there is scope for pre-emptive provision writebacks. In our opinion, the sector’s risk-reward profile remains skewed to the upside. Maintain OVERWEIGHT; BUY ratings include: Maybank, RHB, BIMB, Affin.

Volatile market. Again, KLFIN went on a roller coaster ride in 1H22 and poise to end with a 3% return. At one hand, there was strong appetite for banking stocks (because of rising interest rates) but on the other, market profit-taking was in store, suppressing performance (due to global recession fears). On a relative basis, AMMB (+21%) was the best performer given dividend reinstatement while BIMB (-10%) was the weakest, owing to a string of missed profit estimates.

Better days ahead. While banks recorded flat YoY growth in 1Q22, we expect to see improvement over the next three quarters, backed by: (i) broader NIM, (ii) better loans growth and fee income, coupled with (iii) lower loan loss provision; these are seen to more than overcome: (i) choppy treasury market conditions, (ii) inflationary pressures, and (iii) imposition of Prosperity Tax. Overall, FY22 sector profit is projected to expand 3.7% vs 32.5% in FY21 while ROE is seen widening to 8.9% (+10bp).

Net beneficiaries of OPR hikes. We expect BNM to increase OPR by another 50bp to 2.5% in 2H22, which bode well for banks; every 25bp OPR hike would widen sector NIM by 5-6bp and lift profit forecast by 4-5% (biggest gainers: Alliance, BIMB; smaller gainers: Affin, Public). However, any acute CASA substitution to FD will limit NIM from expanding; every 1% CASA ratio reversal would drag sector NIM by 1-2bp and profit by 1%. A full reversion to pre-pandemic level will only neutralize gains from 50bp OPR hike. That said, BNM has only raised OPR by 25bp so far, suggesting room for more rate increases and a series of this, supports consecutive widening in NIM.

Capable of taking hits. From BNM’s updated stress tests, we learn that cumulative credit losses could come up to RM41.7bn over FY22-24 if GIL ratio jumps to 6.6%. As such banking system profit may drop >30%. That said, we are not overly worried and we see low probability of occurrence, as fresh nationwide lockdown is unlikely. Also, banks have made heavy pre-emptive provisioning in FY20-21 to cushion asset quality weakness. Besides acting as a buffer, writebacks might possibly be in the cards, since the loss coverage for vulnerable Covid-19 related loans is >100% on average.

Bright outlook and undemanding price-tag. Valuations still undemanding as share prices have fallen recently; the sector is trading close to -0.5 and -1.0SD to both its 5- year and 10-year average P/B (at 1.0x). Also, it is lower vs the GFC bottom of 1.14x. Recall, back during the GFC recovery phase, the sector rallied 3SD notches and peak at +2SD above its 10-year mean P/B. Thus, if current cycle mimics the historical GFC valuation recovery trend, the sector may rally to +1SD above its 5-year mean P/B.

Keep OVERWEIGHT. All considered, we view positively the banking sector and opine that the risk-reward profile is skewed to the upside; the combination of robust earnings growth and undemanding valuations will be impetus to drive re-rating. The strategy is to buy selectively on weakness as the market is likely to remain volatile going forward. 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 point. As for small-sized banks, BIMB (TP: RM3.30) and Affin (TP: RM2.35) are preferred; we like the former for its laggard price showing, while the latter has special dividends potential and strong financial metrics.

Source: Hong Leong Investment Bank Research - 1 Jul 2022