Post 4QCY22 earnings season, we maintain our OVERWEIGHT rating on the banking sector. Results were mostly as expected with one positive surprise. While near-term interest income may come in lower from diminishing loans growth and eroding interest margins, non-interest performances are expected to improve as well with easing credit cost and lower effective taxes to drive overall earnings growth. Sentiment may be dimmed by recessionary concerns, but higher industry yields may encourage investors to keep banks as a shelter. For now, we keep our Top Picks on stocks with defensive angles and firm market positioning. CIMB (OP; TP: RM6.55), MAYBANK (OP; TP: RM10.10) and ABMB (OP; TP: RM4.40) are our selected highlights.

Mostly met expectations with some surprises. 4QCY22 results season was mostly in line with our expectations (7 out of 8). There was a positive surprise with PBBANK (OP; TP: RM4.90) as we had underestimated the benefits of the OPR hikes to its net interest margin (NIM) expansion. In terms of commonalities, all of the banks did post sequentially stronger NIMs as the translative effect from a higher OPR was most prominent during the 4QCY22 period. At the same time, CASA levels also eroded as depositors transitioned to higher yielding termed deposits.

(refer to the Fig 1 for the performance breakdown between our forecast and consensus estimates)

Interest rate dynamics to shift. From our expectations that OPR will remain flattish throughout CY23, the migration towards termed deposits would only rise as banks progressively revise their offered rates to be more competitive. On the other hand, variable rate loans would now provide stagnant interest yields to the banks, leaving the inflow of newer fixed rate sign-ups to be a key top line driver. In other words, tighter NIM compression would be inevitable. Further, we opine that the application of newer loans would be less upbeat from the current higher borrowing cost, giving less uplift to financing assets yield.

Muted growth potential, pending significant catalyst to economy. Higher borrowing cost aside, banking corporates also believe the slower demand for loans are held by notably weaker economic growth prospects. In addition to recovering from a low base, output and spending is likely hampered by inflationary pressures and moderating external trade. Our in-house forecast 2023 GDP stands at 4.7% (vs. 8.7% for 2022). To outperform this, we anticipate the need for stronger-than-expected external demand, namely from key manufacturing nations such as China. On the other hand, corporates are seeking for some improvement in terms of treasury and investment returns, which have mostly seen negative fair value adjustments especially on fixed income holdings, no thanks to the rising rate environment. Meanwhile, general perception with regards to credit cost alludes to flattish or to signs of further improvement. Adding to the lapse of CY22 prosperity tax, normalised tax rates could bolster bottom line and ROE performance despite tepid loans outlook. (refer to the Fig 4 for updates on corporate guidances post-4QCY22 results)

Local listed banks continue to take up domestic share. Local listed banks seem to be gaining a larger domestic loans book, making up 76.6% in 4QCY22 (vs 76.1% in 4QCY21). Between the Big 3, MAYBANK (18.0%, +0.2ppts) and CIMB (12.5%, +0.1ppts) appear to be the larger gainers whereas PBBANK (17.4%, -0.1ppts) seem to be shedding share slightly. This is due to the latter’s lower-than-industry domestic loans growth for CY22 (5.2% vs. industry’s 5.7%) as they remain strict on high quality acquisitions. For CY23, we anticipate overall industry loans growth to come in at 4.0%-4.5%, which is slightly below our in-house GDP forecasts. Corporate guidances are also skewed towards targets that are lower than prior years. (refer to the Fig 2 and Fig 3 for the breakdown of domestic market share and domestic loans growth)

Maintain OVERWEIGHT on the banking sector. Post results, we see the near-term outlook for banking stocks to be firmly held up by resilient earnings. The biggest risk to the sector remains to be severe drags in asset quality, possibly triggered by recession or another crippling of global supply chains. Although these threats may only be more apparent in later periods, we believe the higher dividend yield averages from present price points and more generous payouts could keep investors sticky for upcoming quarters.

For the time being, we prefer names with more defensive fundamentals whilst still commanding favourable returns to investors. For the 1QCY23 season, we feature the following as our top picks :- (i) CIMB for defensive NOII reporting as trading performances are supported by its regional entities. It also commands one of the highest CASA books amongst the large cap banks. Notably, we have awarded CIMB with a 4-star ESG rating for its sustainable financing efforts, (ii) MAYBANK which remains our dividend favourite (7-8% yield) and provides shelter for investors preferring more secured returns. As the market share leader in loans and deposits, MAYBANK would also be widely exposed to the benefits of economy reopening, and (iii) ABMB from amongst the small cap banks for being the leader in SME loan proportions (30%) which is expected to be the highest growth segment as well as for its highest CASA mix (50%). The stock’s fundamentals are also comparatively better than its larger cap peers in terms of ROE (10%) and dividend yields (6%).

Source: Kenanga Research - 7 Mar 2023