We continue to view positively the banking sector as the risk-reward profile is skewed to the upside. Potential headwinds like: (i) weakening asset quality and (ii) slowdown in credit growth are not overly concerning. Moreover, the sector is trading inexpensively and recent price pullback is a buying opportunity; we still expect sector earnings to grow at a 2-year CAGR of 10.4% for CY22-24. Maintain OVERWEIGHT; BUY calls include: Maybank, RHB, BIMB, Affin, Alliance.

The negative blend of hawkish US monetary policy, Russia-Ukraine war, and China’s property crisis is fuelling global recession fears. Hence, in this report, we take a closer look at what are the repercussions to Malaysian banks.

Two headwinds that may potentially play out are: (i) weakening asset quality and (ii) slowdown in credit growth. While the former warrants some concern, the latter not so much, in our opinion. From our sensitivity analysis, we estimated every 10bp rise in net credit cost (NCC) could drag earnings by 5% vs the 1% negative impact, as result from a 1ppt drop in loans growth. Furthermore, we are in an interest rate upcycle and the extensiveness of rate hikes (which benefit banks through net interest margin [NIM] expansion) on the entire financing portfolio is much greater compared to the portion of new lending. Besides, our economy is not crippled, like back then during strict Covid- 19 lockdowns, which still saw the sector eked out decent loans growth of 2.5% (Aug- 22: +6.8%).

Manageable asset quality risk. Although banks could enter into a patchy economic period over the next one year, we are not overly concerned with gross impaired loans (GIL) ratio climbing. In our view, they are better equipped vs prior slumps; the large pre-emptive allowances built up in FY20-21 to combat Covid-19 pandemic woes was barely utilized and hence, this may act as buffer to cushion for any short-term asset quality weakness. Furthermore, FY22-23 NCC assumption (28-32bp) pencilled in by both us and consensus are fairly elevated (above the normalized run -rate [18bp] but beneath FY20-21’s level [58-67bp]); including pre-emptive provisions (1H22: 49bp), it becomes on par to global financial crisis (GFC) highs (74bp). Also, we are comforted by the sector’s lofty loan loss coverage (LLC, 97%) and steep collateral value against gross loans (77%).

Inexpensive, opportunity to buy. Valuations still undemanding as share prices have fallen lately; the sector is trading near to -0.5SD and -1.0SD to both its 5-year and 10- year average P/B (at 0.87x). Also, it is lower vs the GFC bottom of 1.14x. Recall, back during the GFC recovery phase, the sector rallied 3.0SD notches and peak at +2.0SD above its 10-year mean P/B. Thus, if current cycle mimics the historical GFC valuation recovery trend, the sector may rally to +1.0SD above its 5-year mean P/B (at 1.25x). Moreover, the sector has a ROE output of 10%, similar to 2018’s level but at that time it was fetching a higher price-tag of 1.3x P/B. Besides, we are only in the middle of an interest rate upcycle (BNM has increased OPR by 75bp YTD vs a total 125bp cut for Covid-19 pandemic) and typically share price performance tends to track and extend 2-3 months beyond the official OPR announcement.

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 - 19 Oct 2022