• Top Picks: CIMB, AMMB, Public Bank, Hong Leong Bank, and Alliance Bank Malaysia. We think 2Q24 sector PATMI could be flattish QoQ (mid-single digit growth YoY) with NII a bright spot, dampened by softer trading and investment income. With the sector’s earnings back to trend growth, this may not excite investors. Still, therein lies the possibility of a potential sector rotation to tide through market volatilities given its inexpensive valuations, attractive dividend yields plus expectations for foreign institutional investor inflows as the US Federal Reserve embarks on its rate cut cycle. NEUTRAL.

• A recap of Jun 2024 banking system data. System loans growth was a strong 6% YoY (+1% QoQ) vs +5% YoY deposits growth (flat QoQ). While the system average lending rate eased 5bps QoQ (YoY: -12bps), the 12-month fixed deposit (FD) rate fell 6bps QoQ (-10bps YoY) on the ongoing efforts to reduce funding cost pressures. Asset quality was sound, with the GIL ratio contracting 2bps QoQ (YoY: -11bps) to 1.60% – the lowest since May 2021, while LLC stood at 91.7% in Jun 2024 (Mar 2024: 92.1%; June 2023: 94.1%).

• Sector income could weaken QoQ... We are generally positive on 2Q sector NII. While some banks had guided for a possible slowdown in the pace of loan growth (eg NIM and capital preservation), system loan growth was healthy. 2Q NIM also tends to be seasonally stronger QoQ, and this would be further supported by ongoing efforts to reduce deposit costs. On a YoY comparison, though, we think sector NIM would still be lower or, at best, flat. On the other hand, we think non-II would be a dampener this quarter, mainly due to the high base enjoyed in 1Q24 and 2Q23 by some banks from the more opportunistic treasury income. Sector fee income, however, should stay well supported by loans and cards fees, wealth management and stockbroking.

• …while impact to PATMI depends on opex control and credit cost (CoC). Individual opex trends will likely be mixed. Some banks have begun accruing for the next collective agreement while for strategic investments, depending on their respective stages, some banks may need to catch up on spending while peak spending may be past for some. YoY opex growth, however, is expected to be back to single digit rise (1Q24: +12% YoY) due to base effect. On asset quality, we do not expect any major negative surprises but certain sectors (SMEs, lower-income households) are worth monitoring. Sector CoC, however, may continue to hover at the low 20bps levels – partly as the healthy loans growth would continue to require expected credit losses.

• Dividends. Several Dec- and Jun-FYE banks are expected to declare interim/ final dividends during the quarter, which would translate to dividend yields of 1.9-3%. While we think banks such as CIMB have the capacity for capital management initiatives, we think it would likely be in 4Q rather than 2Q.

• We are looking out for the following in the upcoming results briefings: i) Loans growth outlook given news flow on strong domestic and foreign investments; ii) deposit competition and room for banks to further reprice down deposit rates ahead; iii) asset quality updates and management overlay plans; and iv) further guidance on the impact from Basel 4.

Source: RHB Securities Research - 16 Aug 2024