We maintain our OVERWEIGHT call on the banking sector. Malaysia’s 2QCY24 GDP of 5.9%, which is above our in-house expectation of 5.1%, encapsulates a sturdier economic landscape against past concerns of slowing from inflationary pressures in the latter half. Chief support came from foreign direct investments which are expected to be mobilised. Adding to potential spillovers into the wider supply chain, this could bolster the financial service sectors and keep banks in the spotlight, fuelling our confidence for loans growth to remain resilient (CY24F system loans growth of 5.5%-6.0% vs CY23 at 5.3%) and better employment prospects coupled by higher civil servant income looking to keep repayments and asset quality in check. Between our seven Outperform calls, we still prefer CIMB (OP; TP: RM7.60) and ABMB (OP; TP: RM4.60) as our Top Picks as they are already well-positioned to demonstrate solid ROEs and dividend returns in the near term. Benefitting most from asset quality improvements is likely RHBBANK (OP; TP: RM7.25) which bolsters confidence in meeting the expected c.7% dividend yield despite more modest growth. We maintain our estimates for now, awaiting the upcoming 2QCY24 earnings release with an average indicative TP upside of c.9% for every +0.5ppt to our GGM ROEs should numbers beat expectations.

A cause to be optimistic. During a recent engagement, BNM reported the 2QCY24 GDP to come in at 5.9% YoY, which saw the largest driver being investment growth (+12.0%). Meanwhile on the supply side, service sectors (+5.9%) and manufacturing industries (+4.7%) benefitted from sustained domestic demand. Construction activities (+17%) heightened by infrastructure project pipelines and are seeing gains from a net inflow of foreign direct investments by RM9.1b (1QCY24: RM5.5b; 2QCY23: RM2.5b) towards the semiconductor sector and data centre development to name a few. That said, BNM still held back on revising its GDP forecast of 4%-5% for CY24, as the economy may still be sensitive to unfavourable fluctuations in commodity prices and lower spending attributed by the weak MYR. These could also tie into BNM’s unchanged headline inflation target of 2.0%-3.5%. While we believe certain tail-end events (i.e. US Presidential Election in Nov 2024) could spur further uncertainties with regards to trade policy, any meaningful impact may only materialise in CY25.

Sector readthroughs on upside risks flagged. Among upside risks BNM highlighted were spillovers from tech up-cycle and faster implementation of new and existing investment projects (as the central bank observed a higher 77% of approved manufacturing projects are now being implemented, from c.70% in the past). The former reinforces our Overweight rating on the Tech sector where we have been bullish on restocking efforts benefitting EMS players, while the latter suggests investors’ interest in construction and utilities sectors will stay keen. Comparatively, private consumption (+6.0%) was less discussed, despite BNM flagging tourism activity as a potential positive. This improves sentiment on consumer broadly and aviation (both neutral weight), as BNM pointed to data of China tourist arrivals having attained 96% of 2019 levels (and we additionally observe that such tourists now account for a pre-pandemic norm of a 12% mix in 1HCY24). In consumer, we remain cautious on spending behaviour persisting into early CY25 potentially, in light of subsidy rationalization including for RON95 ahead. Separately, details on the new public service compensation scheme for Malaysia’s 1.6m civil servants were also unveiled last Friday. Top management will receive a 7% rise, while those in professional and executive roles see a rise of c15%. This move, effective 1 Dec, restores some spending power but is unlikely to induce spending rush, as the effect would be unlike lumpy “windfall” stimulus in the past, we think.

Banks may outperform in loans growth and more relief in cost of funds. As of Jun 2024, system loans grew by 6.4% YoY (+1.2% QoQ) but paired with the recent GDP reporting, could reflect more upside bias to us revising our 5.5%-6.0% loans growth target. It is noted that financing for investments could still be growing with 2QCY24 amounting to RM35.7b (1QCY24: RM32.9b, 4QCY23: RM34.0b) and are mainly attributed by investment-related loans, which is likely to strengthen corporate banking pillars. Further, in light of more business activities, we opine this could also translate to a greater demand for corporate CASA to facilitate working capital needs and hence ease funding cost for the banks.

On the household side, loans are also likely to continue doing well with mortgages and hire purchase keeping pace as large ticket spending appears unwavering, very likely to be supported by upper M40 and T20 consumers. Meanwhile, the abovementioned wage increase for civil servants paired with better-anticipated economic opportunities could strengthen industry asset quality as stresses to meet repayments could ease. That said, the latest industry GIL standing of 1.6% is already fairly commendable being the lowest level in the past three years. Improvements in Stage 2 loans at 7% of total loans in 2QCY24 (from 7.5% in 2QCY23) and inconsequential balances of restructured loans (0.1% of total books) may also alleviate concerns over certain banks with a higher risk profile (i.e. GIL for RHBBANK at 1.8%, MBSB at 7.1%).

We are also assured by BNM’s intent to keep OPR stable at 3% for now, as we believe that inflationary pressures remain uncertain, guided by their wide headline inflation target of 2%-3.5% in spite of the inclusion of subsidy rationalisation. We add that BNM is hopeful to keep OPR adjustments in favour of domestic conditions and may not sway in accordance to global monetary policy changes if unnecessary. This provides opportunities for the banks to further recalibrate their asset yield and funding cost spreads which were previously dampened by untimely adjustments in CY23.

Maintain OVERWEIGHT on the banking sector. Post-BNM engagement, we continue to stay upbeat on the banking sector with a higher inclination for earnings to potentially outperform during the upcoming earnings reporting season. Key winners could likely be the more corporate-centric banks as corporate banking accounts may experience a higher acceleration than retail banking accounts in the near-term. Adding to this, we believe investors may also eye banks with stronger growth prospects as it may indicate market share gains against the slower-performing peers.

We believe our 3QCY24 Top Picks of CIMB and ABMB will continue to come to mind as they are both expected to breach new levels with regards to their ROEs at above 10%. In spite of their recent price rally, they may continue to see appreciation on the back of solid dividend yields at c.6%. For those preferring defensive names, we highlight RHBBANK as the current leader in terms of dividend returns (7%-8%) with a only modest loans growth target of 4.5% in tow. Though we keep our earnings and calls unchanged for now pending updates from the upcoming 2QCY24 reporting season, we are on the lookout for potentially stronger ROE trajectories if loans growth and NIMs surprise positively. On average, a +0.5 ppt change to our GGM inputs could lead to a c.9% increase to our respective TPs, with a higher quantum reflected on banks with significantly lower ROE expectations such as AFFIN (UP; TP: RM1.80) and MBSB (UP; TP: RM0.59).

Source: Kenanga Research - 19 Aug 2024