• Stay OVERWEIGHT. Sticking with our more defensive stance, our Preferred Picks are Hong Leong Bank (HL Bank), AMMB, and Malayan Banking (Maybank). Banks are up c.9% YTD, with the outperformance against the market benchmark (-1% YTD) reflecting the sector’s relatively defensive attributes and the country’s gradual economic recovery. While underlying momentum is healthy going into 2Q22, banks struck a cautious tone on business growth and asset quality. We forecast sector earnings improving by 5.4% YoY in 2022, relatively unchanged post-1Q22 results, with ROE stable at 9.4%.

• Starting 2022 on a steady note. Of the eight banks under our coverage (MY Banks), five had results that were in line. AMMB and CIMB posted earnings that beat our expectations on lower-than-expected impairment charges and recognition of tax credits at AMMB. Bank Islam Malaysia (BIMB) missed expectations for the second consecutive quarter, attributed to weaker-thanexpected non-financing income. See Figures 7-16.

• Hopeful of sustained loan growth. Sector loans grew 1.7% YTD in 1Q22 or an annualised 6.8%. Demand for credit is healthy as evident by the 12% growth in banking system loan approvals for Jan-Apr 2022 and banks’ confirmation of strengthening business momentum with the gradual recovery in Malaysia and the opening of international borders. With headwinds from rising inflation, geopolitical tensions, and the lingering COVID-19 pandemic, banks maintained their guidance for 5-6% loan growth in 2022.

• Slightly more positive on NIMs. Given the earlier-than-expected 25bps hike in the overnight policy rate (OPR) and expectations of a further 25bps increase in 2H22, MY Banks turned a little more positive on FY22F NIMs – stable to slightly higher (from stable to slightly lower). Already, there are signs of a pickup in deposit competition as some banks are undertaking fixed deposit campaigns to lock in longer tenure deposits ahead of further hikes in OPR. This would also see a moderation in CASA growth. Our sensitivity analysis point to a c.2% uplift to sector earnings from a 25bps OPR hike over a 12- month period.

• Asset quality holding up. Banks believe asset quality would hold up, given the sustained fall in loans under relief assistance (LURA) and borrowers able to absorb the expected rise in interest rates. Sector credit cost fell to 19bps in 1Q22 vs our FY22 forecast of 40bps. Still, banks are maintaining their credit cost guidance and reiterated preference to maintain pandemic-related preemptive provisions in 2022.

• Non-II to remain a drag. Continued volatility in financial markets would see lingering risks to non-II, namely income from investment securities and capital market activities. In 1Q22, core fee income fell 7.3% QoQ.

• Capital and dividends. Stable asset quality and moderate loan growth should keep capital ratios at solid levels. Notwithstanding Cukai Makmur, we expect banks to sustain FY21 dividend payout ratios in FY22F.

• Pecking order of our Preferred Pick are HL Bank (solid asset quality, above average loan growth), AMMB (issues of capital rebuild and oil & gas provisions resolved, undemanding valuation), and Maybank (stable operations, ESG leadership and attractive dividends).

Source: RHB Securities Research - 7 Jun 2022