• Upgrade to OVERWEIGHT from Neutral with AMMB, Public Bank (PBK), Hong Leong Bank (HLBK) and Alliance Bank Malaysia as preferred picks. We think markets may be going through a volatile period, and upcoming events (eg US presidential election, US Federal Funds Rate (FFR) cut cycle) likely see volatility persist. Malaysian banks under our coverage (MY Banks) could offer investors a defensive shelter to hide out, backed by stable earnings with upside optionality from further foreign institutional investor (FII) inflows and earnings upgrades if banks’ optimism on the outlook proves prescient.

• A defensive angle... A combination of factors – large-cap and liquidity, limited downside to earnings in the near term given ample loan provision buffers and decent dividend yields (with capital management possibilities) – should help tide investors through the volatility. Also, we think MY Banks should be largely neutral to impending US FFR cuts and currency movements. While sector valuation has rerated recently, it is not stretched, in our view.

• …with upside optionality from FII inflows... FIIs have turned net buyers of domestic equities, with a YTD net inflow of c. USD866m. Nevertheless, this could still be early days as foreign investors continue to warm up to Malaysia’s stable economic growth, domestic reforms and thematic plays. Banks, as liquid, large cap stocks, will likely be beneficiaries of FII inflows.

• …and earnings upgrades. There were some minor tweaks to guidance but only PBK lifted its ROE guidance on an improved NIM and credit cost (CoC) outlook. Nevertheless, banks were generally positive on loans growth ahead, backed by solid pipelines. There was also some optimism that 3Q NIM could continue to trend higher on the back of efforts to lower funding cost while treasury and markets (T&M) income should benefit if bond yields fall from lower global policy rates. Lastly, CoC have been well under control and further overlay and forward-looking provision reversals should prove supportive for bottomline growth. A key downside risk is if deposit competition picks up due to funding requirements to meet loan demand.

• 2Q24 earnings season wrap. Of the eight MY Banks, six posted results that met our expectations. HLBK’s 4QFY24 and AMMB’s 1QFY25 results were a slight beat on lower-than-expected impairments, with the former’s associate contribution also higher than expected. Relative to consensus, seven results were in line while AMMB was tracking slightly ahead of Street expectations. 2Q24 sector PIOP was marginally lower QoQ (-1% QoQ, +3% YoY) – mainly due to the 6% QoQ drop in non-II (+3% YoY) on lower trading and markets income. Sector PATMI was up 2% QoQ (+10% YoY) as 2Q CoC eased 4bps QoQ to 18bps (2Q23: 23bps) coupled with a net writeback in other impairments.

• FY24-25F sector net profit nudged up by 0.5-1% during the earnings quarter. The main recommendation change was our downgrade of CIMB’s call to NEUTRAL from Buy, as post strong share price performance this year, the potential upside is now more modest. We continue to expect the sector to post FY24F-26F PATMI growth of c. 6% pa, backed by loan and non-II expansion while NIM and CoC stabilise.

Source: RHB Securities Research - 9 Sept 2024