Even after increasing the severity of shock parameters on its stress test, we are pleased that the banking sector still has adequate buffers to weather any storm (FY23 GIL ratio projected to climb to 5.8% but CET1 ratio was estimated to stay above regulatory minima at 11.9%). Overall, we continue to view positively the banking sector and also, opine the risk-reward profile is skewed to the upside; the cocktail of robust profit growth and undemanding valuations will be impetus to drive performance. Retain OVERWEIGHT; BUY calls include: Maybank, RHB, BIMB, Affin, Alliance.

Yesterday, BNM published its 1H22 Financial Stability Review Report. In this write-up, we collated the key highlights relevant to the banking sector.

Can absorb hits. Despite the negative blend of hawkish US monetary policy, Russia Ukraine war, and China’s property crisis fuelling global recession fears, our banking system was resilient and able to support financing activities for sustained economic recovery; this is thanks to ample capital and liquidity buffers: (i) strong CET1 ratio of 14.3% (2021: 15.5%) coupled with (ii) robust LCR of 148% (2021: 153%). Separately, from BNM’s even more severe stress test, CY23 GIL ratio was seen climbing to 5.8% (+1.2ppt vs earlier projection) from 1.7% in CY21. As such, banking system profit may decline >30% but CET1 ratio is still estimated to be above regulatory minima at 11.9% (-2.7ppt vs earlier projection). Besides, there are significant provisions build-up to date (1.8% of total loans; 2015-19 average: 1.4%), helping banks to insulate against future credit losses.

HH borrowers remained resilient. Total household (HH) debt-to-GDP fell to 84.5% (2021: 89.1%), thanks to quicker GDP growth. We note that HHs were still borrowing within their means where the median debt service ratio for outstanding/new loans are 35%/43% respectively (2021: 35%/44%). Also, aggregate financial asset-to-debt ratio stood at 2.1x (2021: 2.2x) and if only liquid financial asset was considered, the debt cover is 1.4x (2021: 1.5x). Moreover, HH under repayment assistance (RA) has fallen to 2.4% of outstanding loans (2021: 18.8%). As for URUS, only 7.3k individuals with total loan exposure of RM3.4bn (or 0.2% of total system loans) have enrolled into the program (as of Jul-22). Besides, the share of HH loans classified as exhibiting higher credit risk (Stage 2 loans) has decreased further to 7.9% (2021: 8.5%).

Biz still chugging along. For businesses (Biz), interest coverage ratio stayed stable at 7.1x (2021: 7.1x), debt-to-equity ratio decreased to 21.5% (2021: 22.5%) and the cash-to-short-term-debt ratio ticked up to 1.5x (2021: 1.4x). Also, the share of firms-at risk held steady at 24.1% (2021: 24.7%), although it remained above pre-pandemic levels (2015-19 average: 21.4%) but beneath 3Q20’s peak of 31.9%. At end Jun-22, 13.1% and 16.7% of outstanding SME and non-SME loans were under RA, declining from 30.9% and 22.1% respectively in Dec-21. Moreover, we understand <1% of SME loans that have exited RA since Dec-21 fell behind repayment and only 0.3% turned non-performing.

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 Oct 2022