• Top Picks: CIMB, AMMB, Hong Leong Bank (HL Bank), Alliance Bank Malaysia (ABMB) and Public Bank. 1Q24 sector operating income should be decent YoY (some seasonality in NII QoQ trend) but bottomline trends will largely be dictated by how opex and credit cost behave, in our view. However, with sector earnings growth moderating, we do not expect a meaningful outperformance from the banks in 2024 and as such, retain our NEUTRAL call. Our preference is for banks with brighter growth prospects, and that trade at reasonable valuation.

• Positives from Mar 2024 banking system numbers. System loans growth was a strong 6% YoY (QoQ: +1%), with residential mortgages, auto and SME loans driving the bulk of the growth. Deposit growth was marginally slower, but – positively for sector NIM – CASA growth outpaced fixed deposits. System asset quality held steady, with the GIL ratio declining 3bps QoQ to 1.62% (1QCY23: 1.71%). We expect these trends to filter through the upcoming results, and set out some key expectations below.

• Sector 1Q24 operating income should be decent. While we do not see sector NIM compression surpassing the 1Q23 number, loan growth momentum should be sufficient for sector NII to chalk up positive YoY growth (QoQ, NII tends to be impacted by fewer number of days in 1Q). This would be aided further by system loans growth marginally outpacing deposits growth on a YoY basis. Looking ahead, we understand that the banks have been gradually reducing deposit rates, and this should be positive for NIM. As for non-II, we expect banks to enjoy healthy core fees (eg loan-related, wealth, unit trust, bancassurance), and we learnt that treasury income from customer flow activities have been good during the quarter. While we have less visibility on trading gains, the 10-year MGS yield stability in 1Q24 points towards a mild trading quarter for the banks.

• Sector opex should trend lower QoQ coming off a seasonally high 4Q, with the exceptions being AMMB and ABMB (both FYE Mar). YoY, though, there could be upward pressure from last year’s salary revision for union workers and a catch-up in strategic investments for some banks. As for asset quality, this should be stable and within expectations, but banks remain watchful of certain sectors such as households (low- to mid-income segment) and SMEs. We do not expect significant negative surprises on the credit cost front, particularly as the banks continue to hold on to decent overlay buffers and healthy coverage levels.

• Dividends – no surprises. AMMB and ABMB should meet their dividend guidance (35-40% and 40-60% payouts). We expect AMMB to declare a 4Q DPS of 14.0 sen (3% yield) and 10.8 sen DPS for ABMB (3% yield).

• What’s next? All-in, we are not expecting any major surprises nor material revisions to FY24 guidance at this early stage of the FY. AMMB and ABMB are due to unveil their targets for FY25F (Mar), where ROE guidance and capital management plans should receive particular interest. Lastly, given the brisk loans growth, we would continue to monitor the deposit landscape and hope to gain more colour on NIM trajectory moving forward.

Source: RHB Securities Research - 15 May 2024