• Maintain OVERWEIGHT. The combination of risks and fragilities brought about by the geopolitical upheaval in Ukraine will keep markets volatile and risk-off sentiment elevated. Still, Malaysia, with its relatively defensive attributes, should see some short-term outperformance. For banks, we believe the domestic reopening and improving asset quality themes will remain in play. Taking a slightly more defensive stance, we revise the pecking order for our Preferred Picks to Hong Leong Bank (HL Bank), Malayan Banking (Maybank) and AMMB, while advocating investors to accumulate the others on weakness.

• Another quarter of earnings beat in 4Q21. Of the eight banks under our coverage (MY Banks), five posted results that were above our expectations. AMMB, Alliance Bank Malaysia (ABMB), and Affin delivered strong QoQ rise in net profit. The improvement at ABMB and Affin were driven mainly by lower impairment charges while AMMB’s bottomline was boosted by recognition of a MYR234.5m tax credit. BIMB was the only miss.

• Geopolitical conflict, risk to global inflationary pressure. Our base case assumes that the Ukraine conflict will be contained within Ukrainian borders. Nevertheless, global inflationary pressures will be exacerbated on the back of elevated commodity prices, and at the risk of slowing global growth. On this end, RHB economist expects three US Federal Fund Rate (FFR) hikes by 25 bps in 2022, and closer to home, a 25bps overnight policy rate (OPR) hike in 2H22.

• Pick-up in loan demand, NIM stable: Broadly, banks expect loans to expand by 5-6% in 2022, led by demand from businesses and consumers. NIMs are expected to be stable to slightly lower due to keen competition for deposits and the expected moderation in CASA growth. Almost all banks expect one 25bps hike in OPR in 4Q22, which is not expected to have any material impact on 2022 NIMs.

• Loans under relief assistance (LURA) are expected to meaningfully decline as we approach the tail end of the PEMULIH programme. Overall, banks received very few sign-ups for the Financial Management & Resilience Programme (URUS). Having said that, we may see some upticks in GIL and credit cost in the early part of the year as they exit the relief schemes, but overall, we project sector credit cost to fall to 40 bps in FY22. We are unlikely to see near-term writebacks on the heavy pre-emptive provisions made on LURA as banks expressed the need to remain prudent on asset quality given the ongoing health crisis.

• Dividends. Notwithstanding Cukai Makmur, we believe banks will be able to sustain FY21F dividend payout ratios in FY22F. More importantly, the risk of banks’ capital being eroded by a sharp asset quality deterioration is receding, along with the improving economic outlook.

• We revise the pecking order for our Preferred Pick to HL Bank (domestic focus attributes with solid fundamentals), Maybank (ESG leadership and attractive dividends), and AMMB (earnings recovery, undemanding valuation), while advocating investors to accumulate others on weakness.

Source: RHB Research - 11 Mar 2022