Bank Negara Malaysia (BNM) held an engagement session yesterday in conjunction with the release of the Financial Stability Review 2H 2023.

Household Spending to Improve

Our assessment of the Malaysian banking sector broadly aligns with Bank Negara Malaysia's (BNM) expectations for 2024. BNM anticipates a stronger economic growth rate of 4% to 5%, supporting our projection of a more robust loan growth of 5.8% this year compared to 5.3% in 2023. This growth will be fuelled by anticipated increases in household spending and improved investment activities, among others. BNM predicts a boost in private consumption driven by targeted policy measures and higher income levels, as the nominal compensation of employees is expected to broaden to 5.5-6.5% in 2024, up from 5.3-5.7% in 2023. It also anticipates a slight decrease in the unemployment rate to 3.3% from 3.4% in 2023.

Investment Activities to Accelerate

BNM anticipates the business segment to also improve this year, mainly due to investments supported by both public and private sectors, including significant projects like the ECRL, Pan Borneo Highway, Kasawari Carbon Capture & Storage, MyDigital 5G, RTS Link, and Nenggiri Hydro. Furthermore, MIDA reported a 23.1% YoY increase in approved investments to RM330bn in 2023, dominated by investments in E&E and ICT. With 74% of approved manufacturing projects progressing at various stages of implementation, capital spending is poised to expand. Projecting a 5.6% growth in business loans for 2024 compared to 4.2% in 2023, we anticipate further strengthening of business loans this year.

Banks Well Positioned Under Severe Simulated Downside Scenarios

BNM reiterated the robustness of the Malaysian banking system, highlighting that it is wellcapitalised with a Total Capital Ratio of 18.2% in December 2023 (June 2023: 18.8%) and substantial liquidity buffers, with the Liquidity Coverage Ratio and Net Stable Funding Ratio at 161% and 118%, thus ensuring steadfast support for financial intermediation activities. Banks are anticipated to maintain profitability, supported by sustained loan growth and stable credit costs. Stress tests conducted by the regulator affirm the financial institutions' capacity to bolster economic recovery and resilience against liquidity shocks. Despite potential downside risk scenarios imputed, which included significant MYR depreciation against the USD, spikes in bond yields akin to the Asian Financial Crisis, inflation shocks leading to OPR hikes, and liquidity shocks, the latest stress test projects a moderate decrease in the Total Capital Ratio of banks by 2.7%-points to 15.8%, though still well above the minimum threshold of 8%.

Potential Credit Risks Persist, But Repayment Capacity Is Preserved

Despite the generally favourable asset quality outlook stemming from an overall improvement in business financials, BNM counts potentially higher loan loss as a downside risk. BNM noted that certain sectors such as Wholesale and retail trade, Real estate, and Hotels and restaurants continue to face persistent cost pressures. There are also emerging vulnerabilities within the SME sector, evidenced by a rise in the percentage of SMEs failing to meet repayments, which increased from 1.6% in June 2023 to 2.1% by December 2023. Consequently, SME impairments also experienced an uptick, reaching 3.1% compared to 2.9% in June 2023. Similarly, specific segments of household borrowers, particularly those within lower income brackets and those still grappling with the lingering effects of the pandemic, as well as those previously enrolled in repayment assistance programs, continue to encounter challenges in meeting their repayment obligations. BNM also noted that although the overall household debt had deteriorated to 84.2% from 81.0% in December 2022, the debt repayment capacity of this segment remains well preserved. That said, the household repayments under assistance have improved to 1.6%, down from 1.8%.

Deposit Competition Could Erode Margin

Another downside risk highlighted is higher funding costs and stiff deposit competition, eroding margins. While we also believe that competition continues to persist among banks for deposits, our view is that the intensity of the competition has eased as the OPR approaches its optimal level. We predict BNM to maintain the OPR at 3% in 2024. Our latest channel checks had also indicated a decline in the 6-month deposit campaigns, offering rates ranging from 3.8% to 3.9% at writing, down from 3.95% in June 2023. Despite that, promotional Fixed Deposit (FD) campaigns still offer attractive rates compared to conventional FD rates of 2.75%, based on BNM’s January 2024 data.

BNM to Enhance the Resilience of Banks

Going forward, BNM aims to enhance the resilience of banks by assessing their implementation of Liquidity Coverage Ratio and Net Stable Funding Ratio through the issuance of a new policy document on Liquidity Risk. BNM will also evaluate the performance of various LCR run-off factors and introduce improvements to its operational framework for providing liquidity assistance, among others. Elsewhere, BNM highlighted ongoing advancements in managing climate-related risks within the financial sector. Immediate regulatory and supervisory priorities will centre on crucial initiatives such as harmonising approaches to handling climate-related risks, ensuring financial institutions establish credible transition plans consistent with targets, and facilitating the production of climate disclosures that effectively serve the interests of investors and stakeholders.

Neutral Maintained

We reiterate our NEUTRAL call on the sector. We anticipate improved earnings prospects in 2024, driven by a rebound in domestic activities, support from green investments and a more stable political environment. This positive outlook may also attract renewed foreign interest. However, potential downside risks include rising inflationary pressures dampening the asset quality risks, rising overhead expenses, potentially softer contributions from overseas operations and ongoing geopolitical conflicts.

We maintain our HOLD recommendation on RHB Bank and Maybank. Our BUY recommendation is maintained for CIMB, Hong Leong Bank and Alliance Bank. We also upgraded Public Bank and AMMB from hold to BUY as the risk-reward potential has widened due to the recent decline in share prices. Sell reiterated on Affin.

Source: TA Research - 21 Mar 2024