Post the 4QCY23 earnings season, we maintain our OVERWEIGHT rating on the banking sector. 6 out of 10 reports met our expectations with deviations mostly led by misjudged NIMs. We expect: (i) NIMs pressure to be more subdued, (ii) loans growth to remain positive, albeit with some expecting moderation, (iii) asset quality to remain manageable. As we expect OPR to stay at 3% throughout CY24, we believe banks will face less competition from deposits and will instead focus on optimising financing rates. The sector’s key concerns are the health of the local economy and weak consumer demand on sustained high inflation, increased taxes and the knock-on effect from subsidy rationalisation. Our sector picks for the time being are (i) RHBBANK (OP; TP: RM7.25) as the leading dividend contender and laggard interest, and (ii) ABMB (OP; TP: RM4.30) on solid fundamentals despite its smaller market cap and portfolio size.

Closed with some swings. 4QCY23 results season came in mostly within our expected earnings forecasts (6 results out of 10), with most of the deviations attributed to the smaller cap banks. BIMB (MP; TP: RM2.25) reported stronger-than-expected results on account of better NIM retention. Meanwhile, AMBANK (OP; TP: RM4.80) surprised us with lumpy provisions to cover its remaining repayment assistance profiles, while AFFIN (UP; TP: RM1.80) and MBSB (UP; TP: RM0.59) disappointed due to their diminishing margins no thanks to the intense deposits competition seen cumulatively during the year.

Market-wide, loans growth remained upheld by working capital needs, likely fuelled in anticipation of the early Chinese New Year season. The banks are still noticeably hurt by the higher personnel cost attributed by the reviewed collective agreements. Meanwhile, a notable trend of further IT investments were also seen during the year, as banks seek better capabilities to bolster its outreach and optimise operations.

(refer to the Fig. 1 for the performance breakdown between our forecasts and consensus estimates)

Larger cap players taking the lead. Based on 4QCY23’s domestic market share breakdown, the combined market share of our 10 listed local banks is unchanged QoQ at 81.8%. That said, there appears to be some notable shift in share, notably with MAYBANK (OP; TP: RM11.00) clinching on a greater proportion (18.2%, +36bps QoQ) likely from higher disbursements to mortgages and working capital accounts. ABMB (2.5%, +4 bps) and AFFIN (3.1%, +3bps) appear to be also notable market share gainers with significantly stronger-than-industry loans growth, albeit due to their relatively smaller portfolio. AMBANK (6.2%, -11bps) seemed to have faced the biggest brunt from competition with their moderately lower loans book expansion relative to peers.

(refer to the Fig. 2 and Fig. 3 for the breakdown of domestic market share and domestic loans growth)

Brighter sparks ahead. Looking into CY24, some banks are still expecting NIMs to face some pressure as deposit rates may take time to normalise while asset yields catch up. On the flipside, loans growth expectations for CY24 appears to be slightly more moderate with several banks eyeing potential softness from unfavourable domestic macros, namely a softer forex environment as well as possible inflationary pressures. That said, some support should be expected from greater funding needs by infrastructure projects and the rejuvenation of exporters that benefit from a weak MYR. On the other hand, asset quality concerns are likely to remain subdued given expectations for reporting to remain flattish, as certain banks with balance overlays are likely to opt on reallocating their buffers to nonpandemic related accounts.

(refer to the Fig. 4 for updates on corporate guidances post-4QCY23 results)

Maintain OVERWEIGHT on the banking sector. Post results, we believe investors may continue to see opportunities in the sector as its earnings resilience remains highly supported. Concerns appear to be more muted as compared to past years, albeit with some smaller banks still appearing to be navigating through challenges. We subscribe to flattish OPR at 3% until end-CY24, which could be viewed as providing more stability for the industry as well as banks in the near-term. Aside from that, dividend yields of 6%-7% could still be offered by certain names with sustainable ROEs to boot.

With regards to our preferred picks, we choose to highlight: (i) RHBBANK as its dividend yield prospects are now encroaching c.8% territory, depending on entry level. Notwithstanding this, its CET-1 ratio of >16% is one of the highest amongst its large cap peers. Meanwhile, we reckon concerns on digital bank likely to drag profits could be overplayed, which could explain its laggardness against peers’ share price performance. (ii) ABMB continues to outperform its large cap peers with regards to dividend yields and ROEs. The bank’s high CASA mix could also aid in optimising its margins against future shifts in interest rate dynamics.

Source: Kenanga Research - 6 Mar 2024