Post 2QCY23 earnings season, we maintain our OVERWEIGHT rating on the banking sector. We saw two earnings misses with one on dividends. Unanimously, the banks were affected by: (i) uplifting of loans from continued mortgage support, (ii) comparably softer NIMs from tightening funding cost, (iii) higher personnel expenses from collective agreements, and (iv) stronger treasury performances with recovering investment sentiment. On the other hand, there was an assortment of credit cost readings as some banks opted to write back on their provisions aggressively whereas some stayed cautious. Looking forward, our confidence in the banking sector's resilience remains strong with investors flocking in for safety amidst slowing economic prospects in other sectors. Although this has led aggregate yields to shed to mid-5% (from mid-6%), we reckon interest may persist in anticipation of normalising US Fed rate and hence, risk-free rates. We therefore take this opportunity to incorporate a lower risk-free rate of 4.0% (from 4.5%) across our GGM inputs which boosts TPs by 5%-11%. For now, we still favour tactical buys such as: (i) CIMB (OP; TP: RM6.30) for its leading earnings growth trajectory, (ii) PBBANK (OP; TP: RM4.70) for stakeholder structure clarity, and (iii) AMBANK (OP; TP: RM4.80) for brighter consolidation prospects.

Some minor hiccups. 2QCY23 results season was mostly within our earnings forecasts (8 results out of 10 results). The disappointments came from: (i) AMBANK (OP; TP: RM4.80), and (ii) MBSB (UP; TP: RM0.63) as more stringent credit cost are expected in the latter quarters. We had also anticipated better dividends from HLBANK (OP; TP: RM24.20) but the group opted for a more conservative payout for its final FY23 payment. Market-wide, we continue to see the easing of NIMs post-OPR spurring deposits competition but with stabilisation already showing for certain names on a QoQ basis. Despite hints of softening economic activities, the banks continued to see loans expansion with persistent support from mortgages. However, we note that this was led by a shift from secondary market to affordable primary market units which could hint that households spending may still be gradually pinched. Counteracting the decline in fund-based income, the banks had mostly been able to offset this with better traction in the non-interest income space, with forex gains being a notable contributor. Operationally, higher personnel cost kicked in across the banks following the review of union collective agreements in 2QCY23.

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

Margin spread could gradually re-emerge. Going forward, we are inclined to anticipate that as deposits competition subsides, the average funding cost for banks would ease and better preserve net interest margins. That said, it is not expected to fully mitigate the margins erosion driven by the five 25 bps OPR hikes since 2022. At least for the immediate term, 1HCY23 loans growth could still translate well into 2HCY23’s performance. However, the banks hold a cloudier outlook going into CY24 and anticipate easing growth delivery, perhaps alluding to weaker business prospects should current macros persist. While we had not seen any positive surprises during this reporting season, certain banks that had previously guided for tighter credit cost management may be more open to write-back in the coming quarter.

(refer to the Fig. 4 for updates on corporate guidances post-4QCY22 results)

A cause for better valuations. Evaluating risk-free factors, we opine that US Fed rates are likely leaning towards long-term stabilisation with several anecdotes of hawkishness coming to an end as inflation comes under control. With this in mind, we opt to recalibrate our risk-free rate input in our Gordon Growth Model inputs to 4.0% from 4.5%. This translates to the following changes to our respective target prices. Notably, we revise our call for MAYBANK (TP: RM9.95) from OP to MP.

Local listed banks still the best on the land. Observing 2QCY23’s market breakdown, domestic players continued to gain a wider share at 81.7% (2QCY22: 80.8%) which could be a result of less aggressive efforts from foreign peers, likely as they refocus their priorities on the back of regional rate movements. Between the Big 3, MAYBANK (17.7%, -0.1ppt) and CIMB (12.5%, -0.1ppt) seem to have lost some market share while PBBANK (17.5%) maintained. Top gainers appeared to be AFFIN (3.0%, +0.2ppt), AMBANK (6.3%, +0.2ppt) and HLBANK (8.2%, +0.2ppt) which could be doing better in acquiring household and SME accounts. For now, we believe our industry growth target of 4.0%-4.5% should be intact despite a softer in-house GDP outlook (+3.7% for CY23) as we continue to anticipate strength in the affordable housing markets which could support slow business activities.

(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 believe investors may continue to see opportunities in the sector as its earnings resilience remains highly supported. While asset quality concerns may still arise, we reckon that most of the larger banks have maintained a highly selective and strict credit assessment, not compromising for larger market share. Although industry dividend yields have moderated to mid-5% (from mid-6%), we opine this could still be attractive to long-term investors given the safety net offered by the sector.

For our favourites, we continue to highlight: (i) CIMB as the group is expected to report double-digit earnings growth in the coming years, where some peers could only see more modest performance. We also like (ii) PBBANK as we anticipate that clarity with regards to its future shareholding structure could be a further boost to investor confidence. Post results, PBBANK remains as the champion on asset quality. Lastly, we also consider (iii) AMBANK as we believe its current fundamentals are highly supportive of healthier discussions for M&As, which has in the past been frequently considered. The group is also one of the leaders in terms of SME profile, which is touted as a high-growth segment that could accelerate market share growth for the group.

Source: Kenanga Research - 5 Sept 2023