Review

The banking sector reported encouraging 1QCY24 results, with profits largely meeting expectations for all banks under coverage. The combined net profit for these banks increased by 5.7% QoQ and 7.4% YoY, reaching RM8.6bn. In descending order, the YoY expansion in the sector’s profit was led by Alliance Bank (+36.6% YoY), CIMB (+17.7% YoY), Hong Leong Bank (+12.3% YoY), AMMB (+11.5% YoY), and Maybank (+9.8% YoY). Conversely, Public Bank and RHB Bank saw declines in their net profit by 3.5% and 4.1% YoY, respectively, due to higher operating expenses and increased loan allowances. Affin Bank reported a steeper decline, with net profit dropping to RM110mn from RM149mn a year ago, attributed to lower net interest income (NII) and higher overhead expenses.

The total income for banks under coverage grew by 5.0% QoQ and 11.2% YoY, driven by a turnaround in NII, which increased by 2.7% YoY after four consecutive quarters of decline. QoQ, NII rose by 1.5%. Contributions from Islamic Banking operations also improved, with Maybank, RHB Bank, and Hong Leong Bank leading YoY growth. Non-interest income (non-NII) remained robust, increasing by 16.6% QoQ and 28.9% YoY to RM6.3bn, primarily due to higher trading and investment income. Notably, the sector's core fee income continued its upward trend for the third consecutive quarter, rising by 14.8% YoY (vs 4Q23: +9.8% YoY, 3Q23: +11.3% YoY).

NII showed signs of recovery, growing by 1.5% QoQ and 2.7% YoY. Although the average Net Interest Margin (NIM) is still 10 bps lower YoY, it improved by 1 bp QoQ to 1.97%. This yearly decline has narrowed over the quarter due to the repricing of fixed deposits (FDs) at lower rates. There have also been encouraging signs of more rational deposit competition in recent quarters, with CASA deposits strengthening by 0.9% QoQ and 7.0% YoY, while FD balances expanded at a slower pace of 5.1% YoY.

The loan growth for banks under coverage surpassed BNM’s rate, increasing by 8.0% YoY (+1.7% QoQ). This growth was driven by healthy demand for consumer loans, particularly in hire purchase (+10.2% YoY), mortgages (+8.9% YoY), personal use (+13.6% YoY), and credit cards (+12.1% YoY). SME loans also grew by 9.5% YoY while other business loans show stronger momentum, rising sequentially by 4.6% QoQ.

Overhead expenses grew by 0.3% QoQ and 11.8%. Broadly in line with expectations, the rise in overhead costs was due to inflationary pressures resulting in salary adjustments and increased staff headcount (leading to a 2.2% QoQ and 13.6% YoY rise in personnel cost), and rising IT expenses (which partly attributed to a 2.1% QoQ and 14.2% YoY increase in establishment expenses). In view of efforts to keep a lid on costs, we note that marketing and admin and general expenses declined by 14.0% QoQ (+12.6% YoY) and 4.3% QoQ (+8.7% YoY). On the back of negative JAWS, the sector's cost-to-income (CTI) ratio has widened to 48.0% from 47.4% a year ago. QoQ decline in the CTI could suggest efforts in place to better manage overhead expenses.

Next, the overall asset quality remained healthy as the bank's average gross impaired loans (GIL) ratio improved slightly to 1.58% in 1QCY24 vs. 1.59% in 4QCY23 and 1.66% a year ago. The total impaired loans for all banks under our coverage stood at around RM32.4bn, 1.2% YoY lower than RM32.8bn in 1QCY23. Despite that, we note that loan allowances accelerated by 18.5% YoY (-23.7% QoQ), underpinned by yearly increases in Public Bank, Maybank, RHB Bank and CIMB. The sector’s average loan loss coverage (LLC) fell to 113% from 132% in 1QCY23, with banks like AMMB and RHB having LLCs below 100%, while Public Bank, Hong Leong Bank, and Maybank were above their peers at 169%, 154%, and 121%, respectively.

Finally, the banking system remains well supported by substantial capital and liquidity reserves during the quarter under review, with the CET1 and total capital ratio at 14.0% and 17.5%, respectively. As expected, dividend payout continued to normalise and improve for some banks under our coverage. During the quarter, AMMB proposed a final dividend of 16.6 sen per share, bringing the total dividend for FY24 to 22.6 sen per share, translating to a higher payout ratio of 40% versus 35% in FY23. Alliance Bank proposed a second interim dividend of 11.45 sen, bringing the total FY24 dividend to 22.3 sen, reflecting a stable payout ratio of 50%.

Outlook

Looking ahead, the banking sector is expected to grow by 4.1% in CY24 and 5.5% in CY25, reaching RM34.0bn and RM35.9bn, respectively. Based on rising loan growth, stabilizing NIM, the potential for higher NII, gradual acceleration in fee income, and healthy capital and liquidity buffers, the sector recommendation has been upgraded from neutral to OVERWEIGHT. Potential downside risks include a deterioration in asset quality due to external shocks, softer contributions from overseas operations, and sustained high overhead expenses. Despite these risks, the sector's outlook remains positive, supported by strong performance indicators and growth prospects.

Source: TA Research - 5 Jun 2024