A better-than-expected 3Q21 reporting season where sector earnings rose 25% YoY (lower loan loss allowances) but fell 6% QoQ (negative Jaws). Overall, there were 4 earnings beat and 4 in line. We continue to see recovery in CY21-23 with earnings growing at 2-year CAGR of 11.0%. In our view, the sector’s risk-reward profile remains skewed favourably to the upside as we believe most negatives have been priced in by the market. Maintain OVERWEIGHT; BUY calls include: Maybank, Public, RHB, Alliance, BIMB, and Affin.
3Q21 results round-up. It was a better-than-expected reporting season where 4 out of 8 banks under our coverage beat profit estimates (Affin, Alliance, CIMB saw lower than-expected loan loss provision while RHB booked in stronger-than-expected total income) and 4 came in line (AMMB, BIMB, Maybank, Public),
QoQ. 3Q21 sector earnings declined 6% on the back of negative Jaws (total income fell 2ppt faster opex), caused by weak non-interest income (NOII) which dropped 3% along with the 5bp contraction in net interest margin (NIM). However, ex-Maybank, the lower provision for bad loans (-17%) helped to cushion the overall impact; we note the profit increase for Affin, Alliance and AMMB was mainly due to this reason while RHB experienced stronger total income growth.
YoY. Despite the slight negative Jaws generated from quicker opex growth (+1%) vs total income (flattish), sector bottom-line rose 25%, thanks to lower allowance for bad loans (-31%). At the top, the broadening in NIM (+15bp) and loans growth (+4%) were erased by poor NOII (-23%). Outliers with profit drop were BIMB, Maybank, and Public because of weaker top-line performance, which resulted in larger negative Jaws.
Other key trends. Loans growth remained steady at 3.6% YoY (2Q21: +3.8%) while deposits gained traction to 4.5% YoY (2Q21: +3.9%). Based on these two categories, the top 3 fastest growing banks were Affin, BIMB, and RHB (+4-16%). Separately, for asset quality, it was resilient as GIL ratio trended down 12bp sequentially.
Outlook. We expect NIM to come under slight pressure due to deposit rivalry (typical year end affair) and limited scope for further CASA expansion. Also, lending growth is anticipated to chug along given economic reopening. Separately, GIL ratio is likely to creep upwards but we are not overly worried as banks have already made heavy pre-emptive provisioning in FY20 and in our view, credit risk has been adequately priced in by the market, looking at the high NCC assumption applied for FY21 by both us and consensus (above the normalized run-rate but below FY20’s level). Furthermore, we believe the Government and BNM will stay supportive in helping troubled borrowers, limiting a significant deterioration in GIL ratio.
Forecast. After couple of profit revision this reporting season, we are now projecting 2-year aggregate earnings CAGR of 11.0% (CY21-23) for the sector.
Retain OVERWEIGHT. The sector’s risk-reward profile continues to skew favourably to the upside as most negatives have been considered by the market. In our opinion, Covid-19 woes will likely fizzle out in 2022 while the state of the economy and banking sector will only get better in time. Furthermore, valuations are undemanding and there is ample market liquidity. 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: RM7.00) is favoured for its high CET1 ratio and attractive price-tag. For small-sized banks, all 3 under our coverage are Buy calls for different reasons: (i) BIMB (TP: RM3.45) for its positive structural growth drivers, (ii) Alliance (TP: RM3.30) for its quicker-than-expected upward normalization in dividend payout and high CET1 ratio, (iii) Affin (TP: RM2.25) for its potential value unlocking exercise for AHAM.
Source: Hong Leong Investment Bank Research - 7 Dec 2021