A muted quarter where 2Q22 reporting season saw sector profit falling 2% QoQ (higher loan loss provision) but ticked up 1% YoY (lower allowance for impaired loans). Overall, there were 5 results within expectations, 2 above, and 1 below. Going forward, we see CY21-23 sector profit growing at 2-year CAGR of 9.7%. In our opinion, the sector’s risk-reward profile continues to skew favourably to the upside; the cocktail of robust profit growth and undemanding valuations will be impetus driving performance. Stay OVERWEIGHT; BUY calls include: Maybank, RHB, BIMB, Affin, Alliance.

2Q22 results round-up. There were not many surprises this reporting season since 5 out of 8 banks under our coverage printed in line profit (Affin, AMMB, BIMB, Maybank, Public), 2 above (Alliance posted loan loss provision writebacks while CIMB booked in lower-than-expected impaired loan allowances), and 1 below (RHB experienced weak non-interest income).

QoQ. 2Q22 sector profit decreased 2% given higher provision for bad loans (+75%). However, positive Jaws (total income growth outpaced opex by 2ppt) cushioned some of the damage; net interest margin (NIM) widened 6bp while loans grew 2%. Notable outperformer was Alliance (doubled), thanks to robust top-line growth, impaired loan allowance writebacks, and lower effective tax rate, while underperformers were CIMB (-10%) and Maybank (-9%), which both got hit mainly by elevated loan loss provision.

YoY. Despite negative Jaws (total income +5% vs opex +6%), sector earnings ticked up 1%, on the back of lower allowance for impaired loans (-32%). Large outliers with profit increase were Alliance (+45%, given loan loss provision writebacks) and AMMB (+40%, fuelled by the drop in bad loan allowances). Steep decliner was BIMB (-40%), dragged by lower non-financing income along with higher opex and effective tax rate.

Other key trends. Loans growth gathered traction to +6.3% YoY (1Q22: +5.3%) while deposits held steady at +5.5% YoY (1Q22: 5.5%). Based on these two categories, top 3 fastest growing banks were Affin, BIMB, and Maybank (5-20%). As for asset quality, it weakened slightly, seeing that sector GIL ratio was up 3bp QoQ to 1.76% because of larger NPL formation.

Outlook. Following Jul-22’s OPR hike, NIM is seen to continue expand sequentially. However, the magnitude may be capped by downward CASA mix normalization. That said, loans growth is expected to chug along for now, considering economic recovery is strong. Separately, GIL ratio is likely to rise but we are not overly concerned, since banks have already made heavy pre-emptive provisioning in FY20-21 to cushion this impact. Furthermore, FY22-23 NCC assumption built in by both us and consensus are still fairly elevated (above the normalized run-rate but below FY20-21’s level).

Forecast. After a couple of profit revision this reporting season, we are now projecting 2-year aggregate earnings CAGR of 9.7% (CY21-23) for the sector.

Retain OVERWEIGHT. We still view positively the banking sector and opine that the risk-reward profile is skewed to the upside; the combination of robust profit growth and undemanding valuations will be impetus driving performance. For large-sized banks, we like Maybank (TP: RM9.70) for its strong dividend yield. For mid -sized banks, RHB (TP: RM6.60) is favoured for its high CET1 ratio and attractive price point. For small sized banks, all three under our coverage are Buy calls for different reasons: (i) BIMB (TP: RM3.00) for its laggard share price showing, (ii) Affin (TP: RM2.35) is adored for its special dividends potential and strong financial metrics, (iii) Alliance (TP: RM4.05) for its cash dividend yield of 6-7% and large management provision overlay buffer.

Source: Hong Leong Investment Bank Research - 6 Sept 2022