• Top Picks: Hong Leong Bank (HL Bank), Malayan Banking (Maybank) and AMMB. Over the past week, we held 11 meetings with institutional investors on the banking sector. Overall, there was limited pushback on our call to maintain our OVERWEIGHT sector rating. There was also a preference for more defensive stocks, given the Russia-Ukraine conflict. Concerns were mainly on asset quality, relating to further surprise provisions and potential NIM pressure on intensified competition for CASA.

• Limited pushback on our sector rating. Most clients share our view to remain constructive on banks, notwithstanding heightened risks brought about by the geopolitical tensions – a large-cap sector should still benefit from reopening of the domestic economy, and offer better earnings visibility and good dividend yields. On stock recommendations, there was general agreement on the need for more defensive picks to weather market volatility.

• Will slowing CASA growth and deposit competition exert pressure on NIMs? We believe NIM slippage will be manageable in FY22. With a still-high level of uncertainty on outlook, banks are targeting moderate loan growth in 2022. We expect deposit growth to keep pace, keeping LDR at high 80% levels, thereby reducing the need for aggressive deposit competition. While CASA growth has moderated on the pick-up in economic activities, banks believe that CASA secured in the past two years is stickier vs that of 2015- 2016 (Figure 2). This reinforces our view that banks with stronger CASA franchises will be better positioned to sustain NIMs. MY Banks (ie Malaysian banking stocks we cover) have guided for stable to single-digit declines in NIMs for FY22, with the modest compression coming from funding cost pressures and the widely expected 25bps Overnight Policy Rate hike in 4Q22 having no material uplift on NIMs.

• More surprise provisions? It was generally agreed that banks’ asset quality has improved on generous provisions on COVID-19-affected businesses and higher risk accounts, but there are lingering concerns following the surprise provisions seen in the recent 4Q21 results. These include downside from exposure to commodity traders, and additional provisions on high risk accounts (oil & gas or O&G- and tourism-related). We think lumpy provisions ahead should be fairly limited, as banks have taken quite a fair bit of provisions over the past two years. CIMB guided for more provisions in 1Q22 (relating to the double crediting issue), while we should also see residual provisions from AMMB in relation to its O&G exposures.

• M&A outlook and potential impact from new digital banks? In our view, there are sellers interested to divest their stakes. However, from a buyer’s perspective, we believe larger banks are not especially keen to undertake any acquisitions at this point – given where we are in the economic cycle, and the limited revenue synergies that could be realised from similar operations. Aside from that, the digital banking license that is set to be awarded in the coming weeks should have limited disruptions to the conventional banks in the near term. We believe the banks are well-positioned to fend off potential competition from the new digital banks, if any.

Source: RHB Securities Research - 24 Mar 2022