Investment Highlights

• Banks' 6M24 core calendarised earnings increased 7.9% YoY with stronger total income partially offset by higher operating expenses (OPEX) and provisions for loan losses. Total income of banks rose 8.3% YoY, attributed to an increase in net interest income (NII) of 3.5% YoY, supported by loan expansion and 16.4% YoY growth in non-interest income (NOII). The improved NOII in 6M24 was largely supported by: i) Maybank's higher treasury and markets income, increase in core fees (wealth management, loan-related, brokerage and IB advisory) and stronger income from insurance business. ii) CIMB Group's higher trading, forex and fee income. iii) Public Bank's stronger unit trust, stockbroking income and gains from sale of securities. Provisions for loan losses rose 4.8% YoY in 6M24, attributed largely to normalised allowances for loan losses of Public Bank and the absence of writebacks in RHB Bank's management overlays of RM284mil. Annualised credit cost was flat at 20bps for 6M24 (6M23: 21bps).
   
• On QoQ basis, bank earnings grew modestly by 1.9%. This has been driven by stronger NII from loan growth, improved NIM and lower provisions for loan losses, partially offset by a decline in NOII and increase in OPEX. Average GIL ratio for banks under our coverage continued to trend lower to 1.41% in 2Q24 compared to 1.44% in 1Q24.
   
• 6M24 earnings of 6 banks under our coverage were within expectations while 2 were below. Results of 6 banks (Maybank, Public Bank, RHB, Hong Leong Bank, CIMB and Alliance Bank) were within our net profit estimates. In contrast, Bank Islam's net profit was slightly below our estimate due to lower-than-expected non-fund-based income and higher OPEX. MBSB's earnings missed our forecast, attributed lower-than-expected non-fund-based income and higher-than- projected allowances for financing losses.

• Overall sector loan growth eased to 7.3% YoY in 2Q24 from 8.1% YoY in 1Q24 . Maybank recorded slower loan growth of 10.4% YoY in 2Q24 from 11.2% YoY in 1Q24, owing to a deceleration in corporate loans for all home markets (Malaysia, Singapore and Indonesia). Also, reporting a moderated loan growth was CIMB at 4.2% YoY due to the group adopting a funding-led strategy to protect interest margins instead of focussing on market share and growing by volume. Moving into 3Q24 and 4Q24, we expect sector loan growth to moderate further as larger cap banks such as Maybank and CIMB target to grow financing in right areas/segments with appropriate pricing strategies.

• Average NIM improved marginally by 2bps to 2.12% in 2Q24 vs. 2.1% in 1Q24 with lower funding cost from liabilities management initiatives. While FD campaign rates have gradually trended lower and turned more rational, seasonal year-end campaigns may see intensity for deposit competition rising again, thus impacting margins of banks.
   
• Our sector calendarised core earnings growth for 2024/2025 has been raised to 5.8%/8.8% from 5.3%/8.6% to account for higher NIM and NOII estimates (Exhibit 3).
   
• Downside risk: i) Weaker-than-expected global growth and unexpected increase in funding cost; ii) high interest rates held for much longer in developed markets, resulting in a lower valuation of bonds/securities portfolio, consequently leading to a lower NOII, and iii) slower than anticipated CASA growth resulting in higher intensity for deposit competition.
   
• Maintain NEUTRAL on banking sector as the recent surge in share prices has rerated valuation upwards to FY25F P/BV of 1.1x from 0.9x in early Aug 2024 while potential US Federal rate cuts will impact NIMs of banks with operations in Singapore and Indonesia. We have seen a strong rerating of larger cap systematicallyimportant banks like Maybank/CIMB, leading to higher FY25F P/BVs of 1.3x/1.2x, above their 5-year historical average P/BVs of 1.1x/0.9x. Meanwhile, valuation of Public Bank has recovered from a low 1.3x FY25F P/BV to 1.5x presently. Tracking regional valuations, the average 1.1x FY25F P/B of the domestic banking sector is seen to have edged closer to valuations of Singapore banks (average P/BV: 1.2x) which generate higher ROEs.
  
  With the recent valuation reratings, our BUY recommendations are now leaned towards Hong Leong Bank (FV: RM24.90/share) and Alliance Bank (FV: RM4.80/share), which still have appealing valuations and legs for further run up in share prices. Hong Leong Bank is still trading at an attractive FY25F P/BV of 1.1x, below its 5-year historical P/BV of 1.4x. Besides, this bank has stable asset quality with higher LLC, improving NIMs from better funding cost, potential uplift in fee income from a regional expansion of wealth management business and a still-decent profit contribution from its associate, Bank of Chengdu in China.

Source: AmInvest Research - 9 Sep 2024