A fairly decent quarter since 2Q21 reporting season saw sector profit rising 29% YoY (positive Jaws & lower loan loss provision) but declining 3% QoQ (negative Jaws). Overall, there were 2 earnings beat, 5 in line, and 1 miss. We continue to see recovery in FY21-23 with earnings growing at 3-year CAGR of 15.2%. In our opinion, the sector’s risk-reward profile is still skewed favourably to the upside as we believe most negatives have been priced in by the market. Retain OVER WEIGHT; BUY calls include: Maybank, Public, RHB, BIMB & Affin.
2Q21 results round-up. There were not many surprises this reporting season since 5 out of 8 banks under our coverage posted in line profit (Affin, AMMB, Maybank, Public & RHB), 2 above (CIMB saw softer-than-expected opex and Alliance experienced this as well as stronger-than-expected total income), and 1 below (BIMB booked in softer than-expected top-line & higher-than-expected finance cost from sukuk liabilities).
QoQ. 2Q21 sector earnings declined 3% on the back of negative Jaws (total income contracted 1ppt faster vs opex), caused by weak non-interest income (NOII) which fell 19%. This was prevalent among heavyweights like Maybank, Public, and CIMB. That said, net interest margin (NIM) expansion of 2bp and lower loan loss provision ( -17%) helped to cushion the overall impact. Separately, the strong performances at AMMB, Alliance, and Affin were boosted by positive Jaws (from slightly better top-line growth along with good cost control) and drop in allowance for bad loans.
YoY. Positive Jaws created by quicker total income growth (+6%) vs opex (+4%) and lower impaired loans provision (-42%) lifted up sector bottom-line by 29%; At the top, the broadening in NIM (+25bp) and loans growth (+4%) masked the poor NOII (-14%). Glaring outliers with dip in earnings were AMMB, BIMB, and Affin as the trio incurred higher bad loan allowances.
Other key trends. Steady loans growth at 3.8% YoY (1Q21: +3.8%) but deposits lost traction to 3.9% YoY (1Q21: 6.9%). Based on these two categories, the top 3 fastest growing banks were Affin, BIMB & RHB (+6-11%). As for asset quality, it was resilient as GIL ratio trended down 2bp sequentially.
Outlook. We expect NIM to come under slight pressure premised on brewing deposit rivalry and limited scope for further CASA expansion. That said, loans growth is seen to chug along given gradual economic reopening under the National Recovery Plan. Separately, GIL ratio is likely to creep up but we are not overly worried as banks have made heavy pre-emptive provisioning in FY20 and we reckon credit risk has been adequately priced in by the market, looking at the high NCC assumption applied for FY21 by both us & consensus (above the normalized run-rate but below FY20’s level).
Forecast. After couple of profit revision this reporting season, we are now projecting 3-year aggregate earnings CAGR of 15.2% (CY20-23) for the sector vs our previous estimate of 14.9%.
Retain OVERWEIGHT. The sector’s risk-reward profile is still skewed to the upside as most negatives have been considered by the market. In our view, Covid-19 woes will likely fizzle out in 2022 while the state of the economy and banking sector will only get better in time. Also, valuations are undemanding and there is ample liquidity in the market. For large-sized banks, we like Maybank (TP: RM9.40) for its strong yield and Public Bank (TP: RM4.50) for its resilient asset quality. For mid-sized banks, RHB (TP: RM6.85) is favoured for its high CET1 ratio & large FVOCI reserve to buffer from potential yield curve volatility. For small-sized banks, BIMB (TP: RM4.80) & Affin (TP: RM2.15) are preferred; we like the former for its positive long-term structural growth drivers and better asset quality while the latter has value unlocking potential.
Source: Hong Leong Investment Bank Research - 8 Sept 2021