Post 3QCY24 earnings season, we maintain our OVERWEIGHT rating on the banking sector where one bank reported a positive surprise while another disappointed. The upcoming 4QCY24 season is expected to be bogged down by market-wide deposits competition as banks shore up liquidity for next year. We do not find asset quality to be a major issue across the sector on tighter credit screenings and better overall economic landscape. In the medium term, we expect a shift in appetite between banking systems in the region as our anticipated stable OPR of 3% throughout CY25 could be outshined by new stances in regional monetary policy. Our sector picks for the time being are: (i) HLBANK (OP; TP: RM27.40) on promising headway in earnings growth ex-BOCD, where the latter has been a long-standing contributor to growth for the group, and (ii) AMBANK (OP; TP: RM6.40) for its swelling ROE prospects and growing dividend yield potentials which may set it apart from other high yielders. Among the large cap banks, we like MAYBANK (OP; TP: RM11.95) as despite its leading market share, it holds better-than-industry asset quality with earnings growth expected to outpace its counterparts.

Good set by large caps. 3QCY24 results season were encouraging, with 8 results out of 10 banks reporting within expectations with MBSB surprising positively on the back of stronger NOII performance. On the flipside, BIMB disappointed as its financing growth trajectory was hampered by early redemptions while also being unfavourably impacted by forex volatility, being an outlier of the sector.

Market-wide, we saw most banks showing NIMs reverting positively, notably with PBBANK reversing its negative guidance towards a positive note, being between a stable rate to 1-2 bps increase in the year-end. Meanwhile, AFFIN, BIMB and MAYBANK continued to experience compressed NIMs which were mostly driven by funding costs still being tight, and a concentration to lower yielding assets (i.e. mortgages) did not help.

NOII was mostly affected by greater volatility in forex and bond rates, with stock-broking activities also picking up on greater participation from retail investors and foreign investors. With regards to asset quality, we see credit costs coasting at relatively stable levels albeit with several banks sequentially topping up provisions on specific accounts for safety, namely ABMB and HLBANK.

Market share gap widens. Based on 3QCY24's domestic market share breakdown, the combined market share of our 10 listed local banks came in at 82.4% (+49 bps QoQ). Market leader MAYBANK continued to tighten its grip with a share of 18.6% (+85 bps YoY, +20 bps QoQ) from strong gains in its mortgage book in recent quarters. PBBANK also widened its slice to 17.6% (+10 bps YoY, +15 bps QoQ) similarly with its hire purchase books also gaining good traction. BIMB had the softest performance (-12 bps YoY, -1 bps QoQ) but this was attributed to early redemption from several corporate accounts. While AMBANK and CIMB appeared to lag in their respective loans growth, these are conscious decisions as they focus on acquiring higher margin portfolios in the SME space.

Closing the year in better shape. Eyeing 4QCY24, the banks are unanimously anticipating funding cost to be pressured by seasonal year-end deposits competition. However, this should not overly undermine the banks' earnings with ROE guidances eyeing for stronger outcomes than FY23. We opine most of the uncertainties will come from NOII volatility, especially from MYR strength, and bond yields still exhibiting moderate fluctuations. At least for now, we are growing more confident to put asset quality issues behind the sector, as provisioning needs are lukewarm with only a select few pain points existing (i.e. ABMB's AOA portfolio, MBSB's legacy books, RHBBANK's Thailand assets).

Meanwhile, CET-1 accumulations for some banks have reached new levels. Noteworthy are AMBANK and CIMB (to 15%) following the former's transition to FIRB standards and the latter from strong earnings accretion. The banks guided that this would improve dividend payment capacity and would be gradual in nature. This serves as a relief to the sector especially given that dividend yields have been diluted following the recent run-up in share prices.

Maintain OVERWEIGHT on the banking sector. Post results, we believe the sector's earnings resilience is well-tested but may be less merited by investors as regional markets may echo policy shifts in the US; thereby, interest in the sector is subsiding amid possible shifts in monetary policies mirroring expectations on monetary, undermining our expectations for OPR to remain stable at 3% throughout CY25. Additionally, following the buying rally over the last quarter, sector dividend yields have eroded from an average of 6% to just over 5%, urging investors to be more selective with their picks going forward. Having this in mind, we rotate our favourites to banks.

We highlight HLBANK which has successfully reinforced its domestic operations to outpace its associate, BOCD in term of earnings growth. This would gradually reduce concerns about over-reliance on BOCD for sustaining earnings growth while mitigating the negative implications of HLBANK monetizing its 19.4% stake in the company. We also like AMBANK on the back of a more solid ROE backbone as the group focuses on stronger earnings drivers as opposed to gaining market share in less profitable segments. Following its recent transition into FIRB, the group's new acquired CET-1 levels of 15% could lead to more generous dividend payouts and make AMBANK one of the leaders in yield prospects (6%). This is premised on our anticipated dividend pay-out of 50% against the group's more gradual step-up of 45% (from 40%). Among the large cap banks, we like MAYBANK as despite its leading market share, it holds better-than-industry asset quality with earnings growth expected to outpace its counterparts.

Source: Kenanga Research - 4 Dec 2024