Banking sector to remain resilient

For banks, we believe the domestic economy’s reopening and improving asset quality themes will remain in play


RHB Investment Bank Bhd has maintained its ‘Overweight’ outlook for the Malaysian banking sector as it assumes the combination of risks and fragilities derived from the geopolitical upheaval in Ukraine will keep markets volatile and risk-off sentiment elevated.

According to the investment bank, looking at Malaysia with relatively defensive attributes, RHB expects to see some short-term outperformance.

“For banks, we believe the domestic economy’s reopening and improving asset quality themes will remain in play,” it stated in a sector report last week.

RHB however, revised the pecking order for preferred picks to Hong Leong Bank Bhd (HLB), Malayan Banking Bhd (Maybank) and AMMB Holdings Bhd (AmBank), while advocating investors to accumulate the others on weakness.

Out of eight banks under its coverage, five posted results that were above its expectations. AmBank, Alliance Bank Malaysia Bhd and Affin Bank Bhd delivered a strong quarter-on-quarter rise in net profit.

The improvement at Alliance Bank and Affin Bank were driven mainly by lower impairment charges while AmBank’s bottom line was boosted by recognition of RM234.5 million tax credit. BIMB Holdings Bhd was the only miss, RHB noted.

“Our base case assumes that the Ukraine conflict will be contained within Ukrainian borders. Nevertheless, global inflationary pressures will be exacerbated on the back of elevated commodity prices and at the risk of slowing global growth,” RHB stated.

RHB expects three rate hikes of 25 basis point (bps) in 2022 by the US Federal Reserve while closer to home, a 25 bps Overnight Policy Rate (OPR) hike in the second half of 2022.

Broadly, banks expect loans to expand by 5%-6% in 2022, led by demand from businesses and consumers.

Net interest margins (NIMs) are expected to be stable to slightly lower due to keen competition for deposits and the expected moderation in current account savings accounts growth.

“This is because almost all banks expect one 25 bps hike in OPR in the fourth quarter 2022, and the number is not expected to have any material impact on 2022 NIMs,” it said.

The investment bank also noted loans under relief assistance (LURA) are expected to meaningfully decline as the sector approaches the end of the Pakej Perlindungan Rakyat dan Pemulihan Ekonomi (Pemulih) programme.

LURA is an additional repayment assistance for affected individuals and small and medium enterprises (SMEs), under the Pemulih package announced in June 2021, allowing borrowers, whether from the bottom 40% income, middle 40% income, top 20% income and micro SME groups, to opt-in for a six-month moratorium.

“Overall, banks received very few sign-ups for the AKPK Financial Management & Resilience Programme.

“However, upon the exit of the relief schemes, we expect some increases in the gross impact loan ratio and credit cost in the early part of the year. But overall, we expect sector credit cost to fall to 40 basis points in financial year 2022 (FY22),” RHB added.

In view of the ongoing Covid-19 pandemic, banks have expressed the need to remain prudent on their asset quality thus leading RHB to expect less likelihood of near-term writebacks on heavy pre-emptive provisions made on LURA.

As for dividend, notwithstanding the Cukai Makmur (the prosperity tax) impact, analysts generally think banks will be able to sustain FY21 forecast dividend payout ratios in FY22 forecast.

“More crucially, given economic recovery, the risk of banks’ capital being eroded by a sharp asset quality deterioration will be lessened,” it noted.

RHB likes HLB for its domestic focus attributes and solid fundamentals. It also has a good view on Maybank for its environmental, social, and corporate governance (ESG) leadership and attractive dividends and AmBank due to its potential earnings recovery, undemanding valuation, while advocating investors to accumulate others on weakness.

RHB target price for HLB is RM23.50, Maybank at RM10.40 and AmBank at RM4 per share.