Malaysia Banks to be held up by resilient earnings

PETALING JAYA: As investors seek refuge in better yielding stocks amid recessionary fears, banks may notice an increase in interest.

Despite the fact that financial stocks’ shares have increased since the economy was reopened. Analysts claim that their values are undemanding.

Business-wise, Kenanga Research predicted that after the fourth quarter of 2022 (4Q22) earnings. The sector’s near-term outlook will be support by robust earnings.

“After the fourth quarter of 2012 earnings season, we keep a “overweight” rating on the banking industry. Much as expected, with one pleasant surprise, were the results.

While declining loan growth and shrinking interest margins may result in decreased near-term interest income. Non-interest performances are anticipated to improve. According to Kenanga Research, decreasing credit costs and effective taxation will fuel overall earnings growth.

The biggest threat, according to the research group, is still significant asset quality drags. Which may be brought on by a recession or another interruption in global supply systems.

The higher dividend yield averages from current price points and more generous payouts. In our opinion, could keep investors sticky for next quarters. Although these dangers may only become more obvious in subsequent periods, according to a report by Kenanga Research.

Due to their defensive stances and solid market positioning. The research firm includes CIMB Group Holdings Bhd, Malayan Banking Bhd (Maybank), and Alliance Bank Malaysia Bhd (ABMB) on its list of stock selections for the 1Q23 timeframe.

According to the statement, CIMB was chosen because of its protective non-interest income (NOII). With trading results endorsed by regional organizations. It was mention that among large-cap banks, the banking group has one of the greatest CASA (current account savings accounts) books.

“Maybank, which continues to be our top dividend pick (7% to 8% yield). Offers safety to investors who desire more stable returns. Maybank would also be greatly Highlight to the advantages of the economy reopening. As the market share leader in loans and savings, according to the research group.

According to Kenanga Research, ABMB is the leader among small-cap banks. In the share of loans to small and medium-sized businesses (30%), and this is predict to be its area of maximum growth.

The bank has the greatest CASA composition, at 50%. Although its fundamentals are comparable to those of larger cap peers in terms of return on equity, or ROE, (10% and 6%, respectively).

In the meantime, Maybank Investment Bank Research reported that in the financial year 2022. Banks’ dividend payout ratios were typically returning to their pre-Covid levels (FY22).

The sector is trading at a projected 2023 price-to-book value of just 0.9 times. With an average ROE of 10.5%, according to the report. Sector dividend yield is attractive at 5.4% and 5.7% in FY23 and FY24, while valuations are not demanding.

The research company forecasts a 2.6% increase in operational profits for the industry in 2023. But it anticipates a 14% increase in cumulative core net profits. With space for improvement should credit costs go down more quickly than anticipated.

In light of increased capital market activity and the drop in bond yields. We anticipate a pickup in NOII, although overheads should keep growing at a modest rate of 4% to 5%.

However, according to Maybank Investment Bank Research, which has “buy” recommendations for CIMB, ABMB, AMMB Holdings Bhd, RHB Bank Bhd, and Hong Leong Financial Group. As well as its subsidiary Hong Leong Bank Bhd, “we expect interest margins to compress by approximately seven basis points (bps) on average. And for domestic industry loan growth to moderate to 4.8% from 5.7%.

According to the research company, banks are still keeping the majority of their pre-emptive provisions. Which totaled roughly RM8.5 billion as of the end of 2022, down from RM9.9 billion at the end of 2021.

“Loans under repayment assistance average just about 3% of total loans and if we assume a 20% default rate. With a loan loss given default rate of 30% on these loans. Banks’ pre-emptive provisions would comfortably cover 171% to 656% of these defaults,” it added. Maybank Investment Bank Research said it continues to impute a conservative credit cost assumption of 32 and 27bps in 2023 and 2024 against the pre-Covid average of 28bps from FY17 and FY20.