A respectable quarter where 3Q22 reporting season saw sector earnings up 7% QoQ (better total income) and 14% YoY (positive Jaws and smaller provision for bad loans). Overall, there were 5 results within estimates, 2 above, and 1 below. Going forward, we see CY22-24 sector profit expanding at 2-year CAGR of 9.6% instead of 10.4%. Despite undemanding valuations, we are now less bullish on the sector as we see tailwinds dissipating. Also, investment fatigue for banks is building up, considering BUY merits employed for the past 1-2 years are turning stale. Maintain NEUTRAL; the two BUY calls we have are RHB and BIMB.

3Q22 results round-up. Again, there were not many surprises this reporting season as 5 out of 8 banks under our coverage printed in line profit (Alliance, BIMB, Maybank, Public, RHB), 2 above (both AMMB and CIMB posted smaller-than-expected loan loss provision) and 1 below (Affin booked in higher-than-expected allowance for bad loans and softer-than-anticipated non-interest income).

QoQ. 3Q22 sector profit rose 7% given positive Jaws (total income growth outpaced opex by 2ppt); this could have been faster if not for the 20% increase in provision for impaired loans. At the top, net interest margin (NIM) and loans expanded 6bp and 2% respectively while non-interest income (NOII) nudged up 13%. Notable outperformers were BIMB, Maybank, and AMMB as they were lifted by strong top-line and lower bad loans provision. As for underperformers, Affin and Alliance were dragged by elevated impaired loan allowances and former was also hit by higher opex.

YoY. The combination of positive Jaws (total income +15% vs opex +12%) and lower provision for bad loans (-27%), helped sector earnings to increase 14%. Outliers with large profit jumps were AMMB (+57%) and BIMB (+41%), thanks to the above drivers. Steep decliners were Affin (swung to loss), RHB (-9%), and Alliance (-8%), hampered by a mix of high opex, loan loss allowances or effective tax rate.

Other key trends. Loans growth gained momentum to +8.0% YoY (2Q22: +6.3%) but deposits lost traction to +4.3% YoY (+2Q22: +5.5%). Based on these two categories, top three fastest growing banks were Affin, BIMB, and Maybank (+5-20%). For asset quality, it improved, seeing that sector GIL ratio declined 6bp QoQ to 1.70% because of write-offs, recoveries, and a larger loan base.

Outlook. We see smaller sequential NIM expansion given: (i) bulk of the FD typically will be repriced 6-9 months from the first OPR hike (kick-started in May-22), (ii) CASA being consumed and substituted to FD, along with (iii) price competition for FD. That said, loans growth is expected to chug along for now. Separately, GIL ratio is likely to rise but we are not overly worried, since banks have already made heavy pre-emptive provisions in FY20-21 to cushion this impact.

Forecast. After a couple of profit revision this reporting season, we are now projecting 2-year aggregate earnings CAGR of 9.6% (CY22-24) from 10.4%, for the sector.

Maintain NEUTRAL. Despite undemanding valuations, we are now less bullish on the banking sector as we see tailwinds dissipating (there are lesser rate hikes next year, deposit rivalry is intense, and macroeconomic outlook is softer). Moreover, investment fatigue is building up on the sector, considering that BUY merits employed for the past 1-2 years are becoming stale. Notably, KLFIN performance is not trending any higher and has been range-bound. Now, we only have two BUY recommendations under our coverage, namely RHB (TP: RM6.60) and BIMB (TP: RM3.00). The former is favoured for its high CET1 ratio and attractive price-point while we like the latter for its laggard share price showing.

Source: Hong Leong Investment Bank Research - 7 Dec 2022