Investment Highlights

• Banks’ 2Q2022 core calendarised earnings grew modestly by 2.5% QoQ after stripping out the impact of Cukai Makmur and CIMB Group’s exceptional item (net of tax and minority interest (MI)) of RM44mil and modification loss. The stronger 2Q22 earnings were driven by higher total income supported by an increase in net interest income (NII). NII rose, underpinned by a pick-up in loan growth and stronger NIM in 2Q22 due to the OPR hike of 25bps in May 2022.

• 6M2022 underlying earnings of banks climbed 9% YoY contributed by higher NII of 6% YoY from an expansion of loans and NIM coupled with lower loan impairment allowances, partially offset by weaker non-interest income (NOII) from lower FX, investment and trading income. Operating expenses of banks remained well controlled with a growth of 1% in 6M2022.

• Results of banks were mostly within expectations. The results of banks (Maybank, Public Bank, RHB, CIMB and Alliance Bank) were within expectations. Hong Leong Bank’s earnings outperformed due to better-than-expected profit contribution from Bank of Chengdu. Meanwhile, the core net profit of Bank Islam underperformed due to lower-thanprojected net fund-based income. AMMB’s results were within consensus estimates.

• Sector overall loan growth picked up pace in 2Q2022 with a higher growth rate of 6.1% YoY (1Q2022: 5.1% YoY) (Exhibit 4). Maybank’s overall loans gained traction to register a higher growth of 6.2% YoY in 2Q2022. This was supported by growth of loans in all key markets (Malaysia, Singapore and Indonesia). Meanwhile, gross loans of CIMB rose at a faster pace of 6.8% YoY driven largely by a growth in consumer loans. Commercial and wholesale banking loans expanded as well. Public Bank’s overall loans accelerated to +4.5% YoY in 2Q2022 with stronger domestic and international loan growth.

• Most of the banks’ underlying net interest margin (NIM) expanded in 2Q2022 with the exception of Hong Leong Bank. The sector’s average NIM rose by 5bps QoQ to 2.31% in 2Q2022 compared to 1Q2022 (Exhibit 5) contributed by stronger loan growth and the OPR hike of 25bps in May 2022. Hong Leong Bank’s NIM slipped by 5bps QoQ to 2.1% in 4Q2022 attributed to higher funding cost as the group built up longer term FDs in anticipation of the interest rate uptrend. CASA growth was modestly higher at 9% YoY in 2Q2022. The average CASA ratio (based on our stock coverage) remained stable at 38%. We expect another 25bps hike to increase the OPR from 2.25% to 2.5% in the MPC meeting today. This is based on movements in the 3-month KLIBOR and the shorter 1-year swap rate which has already priced in the rate hike. The increase in interest rates has been baked into our earnings estimates for banks. The OPR is expected to gradually increase to 3.00% (pre-pandemic level) and we see the likelihood of another 25bps rate hike in November 2022. Based on our impact analysis, every 25bps hike OPR will positively impact banks’ NIM by an average of 5–6bps and net profit by 3% on a full financial year.

• NOII remained soft in 2Q2022 contributed by weaker investment, trading and market-related fees. 2Q2022 saw Public Bank recording a decline in unit trust income and lower net gains on financial instruments. Meanwhile, RHB Bank reported lower fee income QoQ in 2Q2022 from IB, brokerage, asset management and commercial banking coupled with a drop in net trading and investment income. 6M2022 NOII for the banking sector fell 19% YoY dragged by the volatile market which impacted banks’ treasury income as well as market-related fees.

• Loan impairment allowances for 6M2022 shrank by 52% YoY with all banks recording lower YoY provisions in line with the decline in loans under financial assistance. On a QoQ basis in 2Q22, most banks reported a drop in provisions except Maybank, CIMB and AMMB. The notable change in allowances for loan losses was the increase in Maybank’s management overlays in 2Q2022 due to macro headwinds. Meanwhile, CIMB’s 2Q2022 provisions rose by 59% QoQ due to additional RM132mil of allowances for losses raised as overlays and adjustments of its MEV model. Banks continued to hold substantial pre-emptive provisions (management overlays and MEV adjustments). 2Q2022 saw only a small portion of the management overlays released following the graduation of loans from financial assistance (RHB: RM35mil and Alliance Bank: RM41mil). Elsewhere, Hong Leong Bank has consumed RM244mil of its pre-emptive impairment buffers built up earlier, allocating it to specific retail and business banking loan portfolios.

• Annualised credit cost for banks in 6M2022 dipped to 0.25% vs. 0.56% in 6M21.

• The percentages of bank loans that were under repayment assistance (RA) continued to trend lower after the expiry of repayment assistance (Exhibit 12). Upticks have been observed in GIL ratios for some banks (RHB, Hong Leong and CIMB) after the expiry of RA. However, we are not overly concerned given that banks still hold substantial loan impairment buffers built up in since 2020 and 2021 in addition to the regulatory reserves. These are envisaged to be able to cushion or withstand the impact of any loans turning impaired after RA.

• Stable GIL ratio for the sector (based on stocks under our coverage) at 1.72% (Exhibit 10).

• The sector's calendarised core earnings growth for 2022, excluding the impact of Cukai Makmur, is now revised higher to 13.7% from 11.0% largely after raising our loan growth estimates and revising our credit cost assumptions lower for banks (Exhibit 3). For 2023, we expect banks’ earnings to grow by 10% YoY supported by higher total income and lower provisions.

• Retain our OVERWEIGHT stance on the sector with top BUYs on RHB Bank (fair value RM7.40/share), CIMB Group (FV RM6.70/share) and Maybank (FV RM10.30/share). For large-cap banks, we continue to like Maybank as our top ESG pick for banks and its attractive FY23F dividend yield of 7.3%. On CIMB, our BUY call is premised on the stock’s attractive valuation, trading at 0.8x FY23F PB/V. Asset quality has improved with lower provisions while cost optimisation and recalibration of its commercial banking business in Indonesia and Thailand are showing results with improved performance. RHB Bank is another of our top picks for banks due to its valuation which remains undemanding, trading at an attractive FY23F PB/V of 0.8% and its strong capital position among peers with a CET1 ratio of 16.6%.

• Downside risk: i) Any prolonged or worsening of supply chain disruptions could impact the pace of economic recovery and consequently affect our estimates for earnings growth of banks; and ii) inflationary pressures rising again, coupled with a slowdown of global economic growth which could lead to stagflation. Stagflation will result in higher unemployment rate and this, coupled with higher inflation rate, could pose downside risk to the asset quality ratio of banks, resulting in a likely need to increase provisions for potential credit losses.

Source: AmInvest Research - 8 Sept 2022