Kenanga Research & Investment

Banking - 3QCY23 Report Card: Margins Mostly Intact

Publish date: Tue, 05 Dec 2023, 09:41 AM

Post 3QCY23 earnings season, we maintain our OVERWEIGHT rating on the banking sector. 7 out of 10 reports met our expectations with deviations being attributed to misjudged NIMs and poorer investment performances. Coverage-wide, constants were made up of: (i) larger YoY books, and (ii) higher personnel costs from collective agreements. We observe varying credit cost readings due to different write-back practices between the banks. Going forward, NIMs should not be as strained as deposit rates are likely at more relaxed levels. That said, we opine banks may compete in the financing front to gain share. We believe OPR may be steady-state at 3.00% throughout CY24 which bring about stable business conditions for the sector. For our sector picks, we continue to recommend: (i) CIMB (OP; TP: RM6.30) for its leading earnings growth prospects, (ii) AMBANK (OP; TP: RM4.80) for its revitalised earnings and strong strides in the SME space, and (iii) ABMB (OP; TP: RM4.30) on stellar fundamentals despite its small market cap.

A few surprises. 3QCY23 results season came in mostly within our expected earnings forecasts (7 results out of 10). We saw a stronger-than-anticipated results from RHBBANK (OP; TP: RM7.15) thanks to successful retention of NIMs amidst previous concerns of further worsening. On the other hand, we had disappointments from AFFIN (MP; TP: RM1.90) and MBSB (UP; TP: RM0.63), with the former seeing prolonged margin stress as it continued to be aggressive to capture market share while the latter booked a less favourable performance on its investment portfolios. Market-wide, most banks have seen the worst being over with regards to NIM erosion on a QoQ level, instigated by intense competition for deposits since Dec 2022. Meanwhile, YoY loans growth still appear encouraging but certain banks may see hurdles in building its books on a QoQ basis which may indicate that competition has shifted towards financing products. Unanimously, the banks continued to see rising personnel cost stemming from the recently reviewed union collective agreements.

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

Diminishing presence from non-key players. Based on 3QCY23’s market breakdown, our 10 listed local banks continued to build a stronger foothold at the expense of the non-listed ones at a combined market share of 81.8% (+69 bps YoY). We reckon this is owing to foreign banks consciously diverting focus back to their respective home markets. MAYBANK (OP; TP: RM9.95) continued to hold the top spot (17.8%) but at a narrower gap against PBBANK (OP; TP: RM4.75) which is at second place (17.6%). This could be due to PBBANK’s prominent retail portfolio which benefits from the rising demand for affordable homes while MAYBANK has a more diverse mix that includes corporate books. Aside from PBBANK, we gathered that HLBANK (OP; TP: RM24.20) and AFFIN were also notable gainers in market share at 8.1% (+24 bps) and 3.1% (+21 bps), respectively, again likely coming from foreign banks’ customers.

(refer to the Fig. 2 and Fig. 3 for the breakdown of domestic market share and domestic loans growth)

Hopeful for better results to come. In the coming quarters, we believe the banks will report better earnings with some banks already seeing net interest income expansion as they had weathered through the toughest product margin conditions. While this may not fully translate in the upcoming 4QCY23 as seasonal deposits competition is bound to occur, there is still more reason to anticipate that CY24 would hold up better than CY23’s reporting so far. That said, we reckon non-interest income performance could be less buoyant as the market and investment landscape seems to err towards stability, offering fewer opportunities for volatile trading. Banks would have to depend on higher fees to make up for this potential shortfall. At the meantime, asset quality risks do appear to be well contained with some of the larger banks still holding on to their pre-emptive provisions tightly and some smaller banks already writing back provisions which are viewed to be in excess. Barring unforeseen macro developments, we may see better if not stable credit cost readings in the near term as more write-backs could counteract pending impairments.

(refer to the Fig. 4 for updates on corporate guidances post-3QCY23 results)

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. Concerns appear to be more muted as compared to past years, albeit with some smaller banks still appearing to be navigating through challenges. We subscribe to flattish OPR at 3.00% until end-CY24, which could be viewed as more stability for the industry as well as banks in the near-term. Aside from that, dividend yields of 6%-7% could still be offered by certain names with sustainable ROEs to boot.

For now and into 1QCY24, we highlight the following names as our preferred picks: (i) CIMB for its possibly leading earnings growth against its peers, fuelled by stronger regional expansion and effective cost saving initiatives leading to certain ventures breaking even in the nearterm, (ii) AMBANK as its rejuvenated fundamentals and high SME profile could see accelerated performance in anticipation of stronger economic activities to come, and (iii) ABMB which continues to outperform its large cap peers with regards to dividend yields and ROEs. The bank’s high CASA mix could also aid in optimising its margins against future shifts in interest rate dynamics.

Source: Kenanga Research - 5 Dec 2023

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