• OVERWEIGHT; Top Picks: Malayan Banking, Hong Leong Bank and CIMB. The 1Q23 results season reinforces our view that the Malaysian banks under our coverage (MY Banks) have levers to support earnings and dividend growth. 1Q NIM squeeze was sharper than expected, cushioned by robust non-interest income (Non-II), benign credit costs and normalising tax rates. Macroeconomic uncertainties persist, but NIM pressure may have peaked and a potential recovery cannot be ruled out. Current low valuations indicate that concerns are mostly in the price, while yields are attractive.

• 1Q23 results were in line. Of the eight banks under our coverage, results from seven banks were in line with our and consensus expectations. Only BIMB missed our and consensus estimates, as both NIM and financing growth disappointed. Post reporting season, we trim sector 2023-2024F earnings by c.1% pa on softer NIM assumptions. 1Q23 sector net profit was up 18% YoY or 4% QoQ, aided by a lower effective tax rate. 1Q PBT growth, however, was mixed (+8% YoY, -8% QoQ). QoQ, while NII fell 12% due to funding cost pressures, this was cushioned by stronger Non-II (+8%, thanks to treasury and FX), lower opex (-5%, due to seasonality), and a 24% decline in loan impairments.

• NIM overhang easing? As we headed into the results season, we believed a key concern was the NIM delta, given stiff deposit competition. Hence, we think the steeper-than-expected QoQ NIM squeeze of 16-46bps may be an overhang-clearing event and further downward pressure on NIM could ease going forward. First, some semblance of rationality has returned, with banks cutting deposit rates post-1Q23. Second, given the earlier anticipation of multiple rate hikes, banks pre-funded growth. We expect banks to allow these high-cost wholesale deposits to run off, to protect NIMs. Third, some banks are looking to shorten the duration of deposits. Finally, May’s overnight policy rate (OPR) hike should provide relief to NIM pressure.

• GIL stable QoQ at 1.62% while LLC was marginally lower at 117.5%. That said, banks remain watchful of loans exiting relief programmes, and relating to sectors such as construction and real estate. As loans continue to exit repayment assistance programmes, banks should see greater flexibility on the use of its overlays, which include redeployment/top-up of provision stock and/or write-backs. We expect better clarity in the coming quarters.

• Guidance mostly unchanged. The NIM squeeze in 1Q23 was worse than the banks’ full-year guidance, but most are maintaining their guidance for now. CIMB and HLBB lowered their NIM projections but maintained FY23F ROEs, as they believe the slack can be compensated from other areas, eg Non-II. As such, while we think there could be downside risk to general NIM guidance, the overall impact to ROE should be manageable – cushioned by healthy Non-II and potential overlay writebacks.

• FY23F net profit to rise 12% YoY, supported by the normalisation of tax rates. Our FY23 estimate takes into account a 10bps NIM squeeze, a slight uptick in CIR to 45% (2022: 44%) and credit cost of 29bps (-3bps YoY). We remain on the lookout for deposit pricing discipline, plans for overlay buffers, as well as further guidance on shareholder returns.

Source: RHB Securities Research - 8 Jun 2023