Post the 1QCY24 earnings season, we maintain our OVERWEIGHT rating on the banking sector with 3 reports coming in above expectations and 7 reports coming in within. Near-term sector trajectories remain as follows: (i) NIMs pressure to be more subdued, (ii) loans growth to remain positive, albeit with some expecting moderation, (iii) asset quality to remain manageable. We expect OPR to stay at 3% throughout CY24 and lower NIM pressures as funding cost-income balance normalises. 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) CIMB (OP; TP: RM7.60) for its newly sustained growth for greater ROE-dividend yield offering to shareholders, (ii) RHBBANK (OP; TP: RM7.25) for its leading dividend prospects, and (ii) ABMB (OP; TP: RM4.60) as a small cap favourite given its largely comparable fundamentals which beats certain large caps.

Decent set with some strong showings. 1QCY24 results season ended positively, with 7 results out of 10 coming in within expectations in addition to 3 banks reporting better-than-expected numbers. CIMB was able to show stronger overall performances with solid trajectory towards building a higher ROE. Meanwhile, AMBANK (OP: TP: RM5.20) closed its FY24 on a stronger note thanks to softer credit cost requirements. MBSB (UP; TP: RM0.59) outperformed thanks to higher-than-expected fee-based income introduced from the integration of MIDF into the group.

Market-wide, although most banks are guiding conservatively on possibly easing in loans growth numbers, their 1QCY24 has shown encouraging results with a handful being able to report above industry numbers (6.0%). Cost-wise, the banks have also reported higher personnel costs, no thanks to the reviewed collective agreements which took place in 2QCY23 and hence led them to compare against a lower base. That said, it is likely that operational expenses could stabilise from here, notwithstanding investments in infrastructure and capabilities. With regards to asset quality, there has been no changes to credit cost guidances as most banks believe troubled accounts have been well-provided for and are looking at reallocating past overlays injected during the pandemic.

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

Larger cap players taking the lead. Based on 1QCY24’s domestic market share breakdown, the combined market share of our 10 listed local banks is at 82.0% (+11 bps QoQ). We note that MAYBANK (OP; TP: RM11.00) which is already the market leader was able to further extend its share to 18.2% (+32 bps YoY, +6 bps QoQ) following wins in several large corporate accounts while also gaining more mortgage books. ABMB’s 2.6% market share (+17 bps YoY, +8 bps QoQ) was attributed by strong gains within the SME space and new-to-bank customers. On the other hand, between the listed players we saw RHBBANK (8.7%, -24 bps YoY, -4 bps QoQ) offloading some market share as we believe the group’s strong emphasis on profitability had led them to only conservatively grow their portfolio behind peers.

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

More precaution than optimism. Projecting the outlook for CY24, most banks have seen past NIMs pressures to be subsiding as the market is rationalising their cost of funds. On the flipside, greater prudence is ascribed against potential US Fed rate cuts in addition to the introduction of targeted fuel subsidies and prolonged weakness in domestic currency which could spur inflation. This led the banks to anticipate a slower 2HCY24 and potential softening of investment markets. However, this could be counterbalanced by 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 non-pandemic related accounts.

(refer to the Fig. 4 for updates on corporate guidances post-1QCY24 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.

Our sector top picks for 2QCY24 include CIMB which has been able to reach new grounds in its ROE at c.11% which the group looks to sustain into the long-term thanks to strengthening presence in both home and regional markets. Additionally, its dividend yield is creeping well into the mid-6% levels at current price points, which is the highest amongst the top 3 banks. RHBBANK is also favoured for its dividends which we project to be the leader (7%-8%) amongst its peers. Meanwhile, its associate Boost Bank may soon enter the public domain which could garner greater interest in the near-term. As for small cap banks, ABMB remains our favourite for its solid fundamentals which are comparable to its large cap peers. Additionally, its leading CASA level may provide the group nimbleness to balance its interest margins with market share acquisition strategies.

Source: Kenanga Research - 4 Jun 2024