BNM has released its Financial Stability Review (FSR) report for 1HCY23. We had a sense of BNM’s confidence on the resilience of our financial system evidenced by sound buffers and strict regulations preventing major fall-outs seen abroad. Further, our domestic players (systemic and non-systemic) are expected to see highly limited exposure to riskier trade partners (i.e. China and recently concerned Middle East markets). Barring unexpected turbulence in domestic sectors, it is expected for BNM to maintain the OPR at 3.00%, which we expect to persist till end-2024. Affordability could be the most immediate concern with possible targeted fuel subsidies likely to press certain demographics. That said, BNM has opted to maintain its stress test parameters which it introduced in the 2HCY22 FSR as it believes the attached variables are sufficient in simulating upside pressures. Maintain OVERWEIGHT for the sector with a focus on banks which are poised for attractive dividend-ROE expansion in the near-term with several tactical opportunities, being (i) CIMB (OP; TP: RM6.30) for forward earnings resilience and high prospective special dividends in the event of overlay write-backs, (ii) AMBANK (OP; TP: RM4.80) for possible resurgence of consolidation talks, and (iii) ABMB (OP; TP: RM4.30) for strong fundamentals comparable to largecap peers with a high exposure to SMEs which may benefit from revitalised economic activities.

Steady fort. Despite shocks in the global banking landscape, Malaysian banks had managed to fend off contagion risks, thanks to tight regulatory oversight from BNM which dictates strict adherence to liquidity requirements as well as credit buffers. While the worst could have well passed us, BNM has so far not indicated the need to relax standards for the sake of safeguarding the integrity of the financial system. Immediate homeground threats remain to be inflationary pressures which may extend with the possible imposition of targeted fuel subsidies (pending clarity from the upcoming Budget 2024) while global factors such as unfavourable exposure to more volatile economies are expected to be insignificant. These concerns arise from the fallout in China’s property markets as well as recent fluctuations in oil prices as ongoing conflicts may crimp its supply chain.

That said, as monetary policies seem to be effective at curbing inflation, we opine BNM is obliged to maintain OPR at 3.00% to combat pressures from possible unforeseen developments. At the moment, banks continue to maintain a stable liquidity coverage ratio of 154% in Jun 2023 (Dec 2022: 152%) and total capital ratio of 18.5% (Dec 2022: 19.0%). Loan loss coverage ratio remains bouyant at 116% (Dec 2022: 119%) amidst a slight rise in gross impaired loans (GIL) to 1.8% (Dec 2022: 1.7%).

Unexciting but stable household sector. Jun 2023’s debt-to-GDP levels of 81.9% (Jun 2022: 84.4%, Dec 2022: 81.0%) is broadly stable but still below Jun 2021’s recent high of 90%. We believe that higher borrowing costs amidst moderate economic growth expectations could likely keep readings stagnant in the near-term. This may apply to flattish loan impairments as seen in the recent report, although we do anticipate delinquencies to improve following Apr 2023’s seasonal barriers. Household debtservicing capacity also appears to be unmoved at 36% (Dec 2022: 37%) for outstanding household loans, which may serve as an indication that employment markets and income prospects are still supportive.

Business sectors still seeing risks but are contained. BNM pointed out that the sectors that are still deemed to be largely at risk are construction and manufacturing given that these areas will likely be pinned more greatly than others when faced with higher input costs and softening external demand. That said, the interest coverage ratio for overall businesses are healthy at 5.5x in Jun 2023 with repayment assistance accounts continuing to see sequential declines to 5.4%, recently. On the other hand, GIL readings have remained mostly stable at 2.8%, slightly above the 2015-2019 average of 2.6%.

Overall, we continue to remain encouraged with the 1HFY23 FSR cementing the resilience of our banking sector. Certain corporates may have indicated a less cautious tone than others as seen in their appetite to write back management overlays, which we can gather now may be warranted. However, the banks that continue to be prudent may still be preferred as not writing back on its excess provisions are not inhibiting sequential earnings growth. We noted that BNM did not refresh its stress testing parameters as risks appear fairly contained with banks continue to be well-capitalised across the board.

Maintain OVERWEIGHT for the Banking Sector. The abovementioned would further cement our stance on the resiliency of the sector. That said, investor may be in the mood to cherry pick given that the sector had experienced a favourable recovery post-March 2023’s global banking sell-down and early-3QCY23’s foreign profit taking ahead of state elections. For our Top Picks, we continue to feature CIMB as they remain to be one of the best-poised players to demonstrate above-industry growth thanks to their enlarging regional footprint. On the other hand, CIMB’s sizeable overlay relative to earnings present some handsome translation to earnings and special dividends. We also highlight AMBANK as we believe its current fundamentals are highly supportive of healthier discussions for M&As, which have 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 should we anticipate better economic prospects in the medium-term. For smaller cap banks, we see potential in ABMB to be a favourite as it is fundamentally comparable to larger cap peers in both dividend and ROE. The group’s strength lies in its high proportion of quality SME accounts which also led the group to maintain one of the highest NIMs amongst its peers.

Source: Kenanga Research - 10 Oct 2023