• Stay OVERWEIGHT; Top Picks: CIMB, AMMB, and Alliance Bank Malaysia (ABMB). Banks are keeping a watchful eye on rising inflation and geopolitical tensions as they head into 2H22. This is reflected in their guarded guidance on loan growth and credit costs despite healthy trends in 2Q22. Our FY22 sector earnings growth is revised to 8% (from 5.5%) on assumptions of better NIMs and slightly lower provision charges. We like CIMB, AMMB (both for traction in ROE recovery and undemanding valuation), and ABMB for its healthy business momentum and gradual release of management overlays.

• 2Q22 beat expectations. Of the eight banks under our coverage (MY Banks), four had results that were in line while three chalked numbers that outperformed our estimates (CIMB, Hong Leong Bank (HL Bank) and ABMB). CIMB and ABMB beat expectations on lower-than-expected provisions and, in the case of HL Bank, healthy net interest income (NII) growth and robust contributions from Bank of Chengdu. Bank Islam Malaysia (BIMB) missed expectations for the third consecutive quarter, on weakness in non-financing income and sharp rise in operating expense (Figures 7-17).

• Staying cautious on 2H22 outlook. Sector loans grew 3.7% YTD in 1H22, or an annualised 7.4%. Still, most banks maintained their loan growth targets at mid-single digits for 2022, citing concerns over heightened inflation and the protracted geopolitical tensions. Loan growth should continue to be supported mainly by demand from consumers and SMEs.

• Slightly more positive on NIMs. Except for HL Bank and BIMB, all banks recorded QoQ growth in NIMs, helped by the 25bps hike in the Overnight Policy Rate (OPR) in May (Figure 10). With OPR widely expected to rise another 25bps in 2H22, bringing the total increase to 75bps in 2022, most banks have turned slightly more positive on NIM. The upward repricing of loans would be somewhat offset by higher funding costs. Fixed deposit campaigns are becoming more evident, but pricing remains rational. While sector CASA remained stable at 37.6% in YTD June, some attrition in CASA deposits would be inevitable. Our sensitivity analysis points to a c.2% uplift to sector earnings from a 25bps OPR hike over a 12-month period.

• Credit cost guidance lowered. Sector loan provisions jumped 66% QoQ in 2Q22, mainly on pre-emptive provisions by CIMB and Maybank. That said, visibility on asset quality has improved since 4Q21, allowing several banks to lower their credit cost guidance for 2022. As a result, our sector credit cost is lowered to 34bps (from 40bps) for FY22F, and 31bps (from 35bps) for FY23F. Except for ABMB, most banks do not intend to reverse management overlays built up in 2020-2021, given the need to remain prudent on asset quality.

• Non-II weakness to persist. Banks believe non-II would remain subdued in 2H22. While core fees may tick up on the recovery in economic activities, income from investment banking and capital market activities will likely be capped by poor investor sentiment. In 2Q22, core fee income rose 2% QoQ.

• Sector earnings tweaked up. Taking into account banks’ guidance on 2H22, our revised sector earnings point to an 8% rise in FY22F (from 5.5%) net profit, and a stronger 18.5% increase (from 19.4%) for FY23F (Figure 6).

Source: RHB Research - 8 Sep 2022