• Top Picks in order of preference: CIMB, Hong Leong Bank (HL Bank) and AMMB. The sector booked decent 2Q23 results, but expenses – interest, operating and loan provisions – increased. While some pressures (NIM and opex) should ease, the hefty 1H23 treasury and markets income may also not be repeated. Meanwhile, deposit competition could ramp up towards the year end. Also, digital banks will be launching operations in the months ahead, and we will monitor how conventional banks react to the attractive deposit rates these new faces are expected to offer. Cut sector to NEUTRAL.

• For now, we forecast 2024 sector earnings growth to revert to trend growth of 6-7% YoY, in line with our FY24F corporate earnings growth of 7- 8% YoY. This, with the recent cut in our rating for Malayan Banking (Maybank) to NEUTRAL from Buy, rationalises our sector downgrade.

• 2Q23 results in line. Of the eight banks we cover (MY Banks), five posted results that were in line. CIMB’s results were a slight beat, as non-II stayed robust while credit cost has been milder than expected, whereas BIMB’s and AMMB’s numbers missed estimates due to a higher-than-expected tax rate and weaker-than-expected NIM respectively. 2Q23 sector PATMI was flat QoQ (+22% YoY), led by a 21% QoQ (+52% YoY) jump in non-II on higher treasury and market income. This was partly offset by higher opex (+5% QoQ, +9% YoY) due to the collective agreement (CA)) and loan impairments (+18% QoQ, -21% YoY). Loans grew 2% QoQ (+7% YoY), matched by 2% QoQ (+5% YoY) deposit growth. Sector GIL ratio was up 3bps QoQ to 1.65%, while LLC decreased to 111%, from 118% in 1Q23 (2Q22: 120%).

• Briefing highlights. NIM guidance was toned down, now that 1H23 numbers are available (Figure 11). However, the revised guidance implies that banks are expecting 2H23 NIM to be stable vs that of 1H23, or slightly better. The banks continue to manage down their deposit cost, and feedback is that the cut in deposit rates has not crimped volumes. On asset quality, banks remain watchful of loans exiting relief programmes for both the retail and SME segments. Given the recent weakness in macroeconomic data, the banks intend to retain the bulk of the remaining stock overlays and guided that potential writebacks in 2H23 are not likely to be material. However, as 1H23 credit cost has been benign, some banks revised down their 2023 credit cost guidance. On balance, 2023 ROE targets were broadly retained.

• Sector’s aggregate FY23-24F net profit trimmed by 1-2% … mainly as we bring our NIM assumptions in line with the management teams’ refreshed guidance. The biggest cuts to PATMI projections were made for AMMB (-12% to -13% pa) on lower NIMs, while the only upward revision was for CIMB (+2- 3% pa), being premised on better non-II. On stock calls, we downgraded Maybank to NEUTRAL as its relative outperformance YTD means that the potential upside to TP is now limited.

• …FY24F bottomline growth at 6-7%, supported by stable loan growth (c. 5%) and NIM, together with a small improvement in credit cost to 27bps from 29bps in 2023F. We think the overlays that the banks plan to carry over into 2024 should help to shield earnings, in the event that their asset quality pans out worse than expected.

Source: RHB Securities Research - 6 Sept 2023