We maintain our OVERWEIGHT call on the sector. Local banks will likely remain as a safe haven against ongoing recessionary concerns on better near-term earnings growth security. The demand for loans should continue to be supported by more working capital needs while the interest rate upcycle should bolster margins, albeit we expect normalisation in 2HCY23 should there be no further hikes beyond the anticipated 25 bps bump in Jan 2023. On the flipside, banks are preparing against possible erosion in asset quality if inflationary pressures get the best of the market. Still, we reckon present buffers are sufficient with hopes of writebacks should the above anxieties prove to be lacking. That said, the longer-term outlook for the sector hinges on GDP outperformance to keep loans growth upbeat amidst possible margin reversion as rate competition brew. For 1QCY23, our Top Picks continue to lean on names with sustainable performance and additional investible merits, being: (i) MAYBANK (OP; TP: RM10.40) over dividend safety (7-8% yield) and market leading share, (ii) CIMB (OP; TP: RM6.40) for supportive regional performance, and (iii) ABMB (OP; TP: RM4.20) for its high SME loans and CASA mix with solid ROEs (11%) and dividend prospects (6%). We also upgraded PBBANK (TP: RM4.70) to OP from MP to capitalise on share price weakness amidst unchanged fundamentals.

Possible steady state OPR at 3.00%. While the US Fed had a very hawkish bearing on the Fed Funds Rate (3.75-4.00%, +375 bps in 2022), BNM has been relatively moderate with OPR hikes (2.75%, +100 bps in 2022) and we expect monetary tightening to halt in the coming quarter. We anticipate one final 25 bps hike in the Jan2023 MPC meeting. Our domestic economy will still be faced with inflationary pressures but perhaps at a lesser extent as compared to regional counterparts, thanks to broad-based improvements in output (led by manufacturing and service industries). Due to this, we believe BNM may take a more observatory position on the laggard impact of interest rates to private consumption before deciding its next move. While we are hopeful for further correction in the global supply chain to rebalance trade, the leading catalyst for prosperity would be a complete reopening of China to drive the commodities market and fuel further manufacturing output. In CY23, we anticipate industry loans growth to come in at 4.0-4.5% against CY22’s anticipated close of 5.5-6.0%, reflective of the concerns above.

Keener eyes on impairment buffers. Inflationary pressures could only rise in the coming quarters as the pinch from higher rates would materialise then. While corporates have expressed the gradual increase in non-performing loans to be natural post-repayment assistances, tighter cash flows may press previously unconcerned accounts, namely among the low-to-mid income groups. Housing loans commitment could be the largest affected, given its mostly base-rate plus nature. Still, we gather that management overlays and provisions booked can be fluid in nature and be refreshed to cover segments in need. Our pulls from recent 3QCY22 levels still show sizeable coverage offered by overlays in place, with top-ups likely to be minimal notwithstanding large scale asset quality shocks brought by unforeseen factors. Meanwhile, the loan loss coverage for most banks are well above 100%, providing a much needed safety net.

Maintain OVERWEIGHT on the banking sector. The fundamentals for the banking sector are still expected to demonstrate resilience in the near-term. Though tailwinds could be showing signs of attrition, we believe the overall sector risk profile of banks are more favourable as opposed to other sectors in key market indices, hence possibly drawing further accumulation in the coming periods. Key surprises would be derived from the possible writebacks of the abovementioned provisions, which are not accounted for in our earnings models. For 1QCY23, we prefer to continue highlighting names with stronger backing to share price and earnings support, being: (i) MAYBANK for its persistently high dividend cushions (7-8% yield) and market leading share, (ii) CIMB for resilient non interest income stream performance led by regional operations, and (iii) ABMB for its strength in the SME space which is expected to deliver high growth in a recovery environment. It also commands solid ROE (10%) and dividend potential (6%) despite its significantly smaller market cap.

Source: Kenanga Research - 16 Jan 2023