We maintain our NEUTRAL call on the sector.Our highly vaccinated economy is expected to deliver strong recovery head on, less we regress to implementing movement restrictions likein2021. Small businesses are expected to be one of the key growth segments, having been stifled over the lasttwoyears from less friendly operating environment.Earnings-wise, loans growth and easing of credit cost should bolster profits but this will be mitigated by the one-off prosperity tax for the year.At the meantime, the industry would see some shake ups in 2022 as up tofivenew digital banks couldenter thescene in 1QCY22 and drivingupthe competition for deposits. We also anticipate an OPR hike in 2HCY22 having levelled at 1.75% since Jul 2020.Inthe nearterm, we advocate positioning selectively as industry-wide sentiment could still be lacking until GDP growth materialises. Our Top Picks for the sector are: (i)RHBBANK (OP; TP: RM6.50) as a prospective digital bank player via its partnership with Axiata Digital (Boost) paired by handsome dividend yields (6%) and capital strength (CET-1: 16%);and(ii)ABMB (OP; TP: RM3.25) which we upgraded (from MP; TP: RM2.65) as a prime beneficiary from economic reopening given their high SME loan mix (46% vs.average 35%) and solid fundamentals relative to similarly-sized peers. Following recent share price movements, we also upgrade MBSB (TP: RM0.540) from UP to MP.

Strong note at 3QCY21 earnings. The recent 3QCY21 reporting season was positive as we saw four outperformers against our earnings estimates in ABMB, AFFIN, CIMB and RHBBANK. They were mostly due to our overly conservative NOII and credit cost assumptions as recovery on financing assets and funds performances turned around more quickly than anticipated despite underlying hiccups from movement controls. Meanwhile, we only saw one disappointment in MBSB as they booked in wider-than-expected modification losses arising from the Jul 2021 moratorium. The remaining banks (AMBANK, BIMB, HLBANK, MAYBANK, and PBBANK) performed in line with our model estimates.

4QCY21 could close mixed. From our engagements with various managements, different tones were apparentregardingthe implementation of PEMULIH as some are expecting a large influx of URUS applications towards the end of the program. We believe the recent floods could only aggravate the situation, albeit with most banks not expecting their B50 customer group to be <30% of total books. The tone towards impairment provisioning is still mixed, with some bank still opting for more cautionary measures which could be reflective in the year-end earnings report (refer to the overleaf for further discussions and Table 4 for the most recent earnings guidances).

2022 happenings. Banks will be looking out for the following developments arising in 2022. Broadly, a one-off prosperity tax from the Budget 2022 would suppress earnings recovery, particularly on the larger banks given the RM100m earnings threshold at entity level. Our estimates indicate an exposure of RM50m-RM800m or 5%-14% compression of our earnings forecast. In 1QCY21, BNM should be awarding up tofive digital banking licenses from among 29 applicants. We believe the likely candidates would be those with an already strong presence in e-money services as it could allow a more seamless introduction of digital banking services with an accelerated adoption. The entry of such players could intensify competition for deposits against conventional players, which could be further pressured by our expectations for a possible OPR hike in 2HCY22. In the past quarters, banks saw NIMs expanding favourably in spite of the lower OPR introduced in Jul 2020 (1.75%) as deposits were repriced more efficiently than their financing books. The opposite could be expected, especially with a higher CASA mix (Oct 2021: 30.2% vs. Jul 2020: 28.0%) possibly being reflected more quickly. On a much lighter note, banks would be moving to a standardised Base Rate (benchmarked to OPR) in Aug 2022 to form a more comparable reference on new floating rate loans applicants.

Maintain NEUTRAL on the Banking Sector. We are seeing greater business confidence as we move towardsa highly vaccinated economy which should translate to better financing health. That said, we believe near-term sentiment could be hampered by medium-term competitiveness led by the injection of digital banking products. While we do not believe this will be a threat to the loans market given their target on micro-loans and personalised products, the need for cheap funds (i.e. deposits) is uniform as with the conventional banks. To position for this, we recommend RHBBANK (OP; TP: RM6.50) as a 1QCY22 top pick. RHBBANK is the only listed conventional bank vying for a digital banking license via its collaboration with Axiata Digital (Boost) which we believe has strong odds of winning a license. Although the digital bank might not contribute to earnings immediately, a frontrunner exposure could yield favourably as the landscape matures. That said, investors are compensated by the bank’s high dividend returns (~6%) and solid capital positioning (CET-1: ~16%) to cushion against unexpected shifts from worsening Covid-19 risk. Meanwhile, we also highlight ABMB (OP; TP: RM3.25) which we upgrade from MP andTP of RM2.65 on better ROE expectations in our GGM assumptions. ABMB has the highest SME mix amongst its peers (46% vs.averageof~35%) which should allow for higher growth traction in line with economic recovery. Management’s confidence to resume dividend payments to pre-pandemic levels (40%) translates to yields of ~5%, better than its similarly-sized peers. Additionally, an expected 9% forward ROE is parallel to larger cap competitors.

Projecting a 5% loans growth in 2022. As of Oct 2021, system loans growth reported at 3.3% YoY, which is within our industry-wide expectations for 2021 at 3-4%. We believe the remaining months should also deliver positively as economic strength regains from easing movement restrictions, premised by our high nationwide vaccination rates. Looking forward, if we extrapolate an average MoM growth of 0.4% (vs 2021 average: 0.3%) as a reflection of economic recovery, a 5% system loans growth for 2022 does not seem unwarranted. We anticipate SMEs to be one of the main contributors to business loans, as they were underperformers in 2021 no thanks to movement controls impeding a stable and business friendly operating environment. Household loans could remain relatively buoyant for as long as OPR remains stable, attracting lower interest rates for home financing. That said, there could be some resistances in 2HCY22 assuming Bank Negara decides to raise rates, which is what we are anticipating.

Normalising NIMs for better asset quality. Sector NIMs appear to be normalising post its heydays in past quarters where banks benefited from cheap cost of funds as deposits were repriced favourably. Banks are expectedto compete tobalance LDR levels (Oct 2021: 87.2%) to fuel the upcoming influx of loan demand. At the meantime, CASA-to-deposit ratio (Oct 2021: 30.2%) could ease as customers may opt to consume more and if interest rates do indeed become more rewarding in line with the increased competitiveness in this space. On the flipside, GIL ratios have remained steady despite the challenging economic environment as banks kept their asset quality checks tight. We suspect there should be further room for improvement as a stronger operating landscape could strengthen cash-flows and income to business and personal accounts.

Source: Kenanga Research - 29 Dec 2021