• Stay OVERWEIGHT, prefer Hong Leong Bank, AMMB and Malayan Banking. Bank stocks are up a modest 5% YTD-Jul 2022, retreating from an almost 10% gain between Jan 2022 and early May 2022. Concerns over rising recessionary risks are weighing on investor sentiment and performance of bank stocks. Still, banks offer some degree of hedging against inflation. Earnings growth of 5%, though not exciting, is decent as are dividend yields. We recommend defensive names to weather market volatility.

• Recession not our base case. The domestic economic recovery, reopening of international borders, and special MYR10,000 Employees Provident Fund (EPF) withdrawal from Apr 2020 should sustain banks’ business momentum and support delivery of another set of decent results for 2Q22. Expectations for a better 2H22 and 2023 are, however, beginning to wane as risks to growth are tilted towards the downside. RHB economists expect GDP growth to moderate to 4.5% in 2023, from 5.3% in 2022. Economic recession is not our base case.

• NIM prospects improving. Bank Negara Malaysia (BNM) has raised the overnight policy rate (OPR) by 50bps to 2.25%, and RHB economists believe the balance of risks is skewed towards a third hike of 25bps to 2.50% in Sep 2022. The earlier- and higher-than-expected rate hikes should have a positive impact on banks’ NIM in 2022-2023. Our calculations point to a c.2% uplift in FY22F sector earnings with smaller banks expected to post stronger improvement of 3-5% vs c.2% for large banks.

• Sustained loan growth in 2H22. The rebound in consumption and business activities from the depressed levels during the pandemic lockdown periods, should see banks achieving their mid-single digit loan growth for 2022 (May 2022: +4.7% annualised). While we do not expect the recent OPR hikes to adversely impact loan demand, any earlier hopes of a positive surprise have now been snuffed out.

• Asset quality to hold up. System gross GIL ratio rose to 1.64% in May 2022 (Dec 2021: 1.44%), in line with banks’ expectations that impairments would rise once relief programmes begin to expire. More importantly, loans under relief assistance have seen meaningful declines, with only a small proportion missing repayments. We expect sector credit cost to be a lower 40bps in 2022 (2021: 47bps). We believe the rise in interest rates can be absorbed by borrowers with no material negative impact on asset quality.

• Non-II to remain a drag in 2H22. Core fee income, which fell a sharp 16% YoY in 1Q22, is expected to stay weak for the rest of 2022. Ongoing volatility in global financial markets would weigh on fee income for brokerage, wealth management, and investment banking activities. Non-II accounted for 21% of sector total income in 1Q22, down from 24.3% in FY21 and 28.5% in 1Q21.

• Earnings and dividend. Sector earnings are projected to grow 5.4% in 2022F capped by Cukai Makmur. PPOP growth of 3.7% reflects a moderation in topline growth against the expectation of a pick-up in operating expenses and IT investments. Stable asset quality and moderate loan growth should keep capital ratios at solid levels. Notwithstanding Cukai Makmur, we expect banks to sustain FY21 dividend payout ratios in FY22F.

Source: RHB Research - 13 Jul 2022