The dividend payouts for FY22 are expected to grow 4.6% YoY, supported by strong liquidity and capital buffers 

by S BIRRUNTHA / Pic by TMR FILE PIX

THE Malaysian banking sector’s aggregate dividends are expected to increase by 26% year-on-year (YoY) to US$3.43 billion (about RM14.37 billion) for financial year 2021 (FY21) after a 27.8% plunge for FY20 due to Covid-19, according to IHS Markit. 

Its research analyst Tanisha Bhardwaj said the dividend payouts for FY22 are expected to grow 4.6% YoY, supported by strong liquidity and capital buffers. 

However, she noted that there is a mixed picture for dividends in FY21. 

“AMMB Holdings Bhd decided to hold dividend payouts until the end of the year owing to cautious capital management, while CIMB 

Group Holdings Bhd is expected to boost its year-end dividend more than threefold compared to last year. 

“Malayan Banking Bhd (Maybank) and Public Bank Bhd will continue to be the top dividend contributors,” she said in a note yesterday. 

Bhardwaj added that the Malaysian banking sector outlook for FY22 is stable as economic activity is expected to return to pre-Covid-19 pandemic levels, leading to more jobs and higher wages, as well as a gradual increase in interest rates that will help banks improve net interest margins and profitability. 

She emphasised there are still uncertainties around the Covid-19 pandemic and prolonged supply chain disruptions, as well as natural disaster risks, such as flood. 

“The upbeat trend is aligned with the regional sentiment across South-East Asia. 

Banks in Thailand, Singapore and Indonesia are poised for steady growth in the new year,” she said. Bhardwaj noted that banking dividends for all four markets are expected to rise by 9.25% on average for FY22.

CGS-CIMB Securities Sdn Bhd stated that Malaysian banks have been actively providing preemptive provisions or management overlay for the credit risks from the Covid-19 outbreak since the second quarter of 2020 (2Q20). 

Analyst Winson Ng said the research house estimates that the management overlay totalled RM6.84 billion at end of September 2021 for Malaysian banks under its coverage, accounting for 35% of the banks’ total gross impaired loan (GIL). 

“This should provide a strong buffer against any increase in GIL in 2022F, in our view. 

“Although the management overlay only accounted for an estimated 2.4% of the total loans under repayment assistance, we are not overly concerned about this as we think that only a small percentage of these loans would eventually turn into GIL, premised on the improvements in loan delinquency rate following the reopening of economy and continuous repayment assistance offered by banks to their borrowers,” he said in a note yesterday. 

Ng believes the provisions could be written back in 2023 — at the earliest — if the GIL ratio does not spike in 2022. 

He estimated that a write-back of every 10% of management overlay would lift its profit forecast for FY23 of Malaysian banks by around 2%. 

“The impact would range from 1.5% or Public Bank (due to its strong net profit base), to 5.4% for Alliance Bank Malaysia Bhd (due to the management overlay ratio of 71.2% over its FY2023 net profit),” he noted. 

CGS-CIMB sees the potential write-back of management overlay as a new earnings catalyst for banks from 2023. 

This along with the expected hike in Overnight Policy Rate (OPR) and the downward trend in loan loss provisioning could act as potential rerating catalysts that underpin the broker’s ‘Overweight’ call for the banking sector. 

Ng added that potential downside risks include a wider than expected increase in GIL ratio and no OPR hike in 2022. 

CGS-CIMB’s top picks for the sector are Hong Leong Bank Bhd, Public Bank and RHB Bank Bhd. 

Based on its analysis, Alliance Bank and AMMB would be the biggest beneficiaries of the potential write-back of management overlay (a positive impact of 5.4% and 4.2%, respectively, on their FY23F net profit from every 10% provision write-back). 

AMMB remains its top pick for write-back play as it is trading at a lower calendar year 2022 forecast (CY22F) price-to-earnings (P/E) valuation of 7.1 times and has better asset quality which is reflected by its lower GIL ratio of 1.44% versus Alliance Bank’s 2.32% at end of September 2021.