• Top Picks (in order of preference): CIMB, AMMB, Hong Leong Bank (HL Bank), Alliance Bank Malaysia (ABMB), and Public Bank (PBK). Malaysia banks had a good start to the year, thanks to operating income strength – underpinned by both NII and non-II – while asset quality held up. We remain NEUTRAL on the sector amid moderating earnings growth prospects, and continue to prefer growth stocks with reasonable valuations.

• 1Q24 results met expectations... Of the eight banks under our coverage, seven posted results that met our expectations. BIMB was the sole disappointment due to weaker-than-expected non-financing income. Compared against consensus figures, five results were in line, AMMB was a beat, while both Affin and BIMB came in below Street expectations. AMMB’s interim DPS was above expectations, as the completion of its capital build-up allowed it to raise its FY24 dividend payout ratio to 40%, from 35% in FY23.

• … with operating income strength and stable asset quality as key positives. 1Q24 sector PATMI rose 7% YoY (+5% QoQ) on the back of an 11% YoY (+5% QoQ) operating income growth. NII rose 4% YoY (+2% QoQ) mainly due to healthy loan growth of 7% YoY (+1% QoQ) – partly offset by a NIM squeeze of 7bps YoY (-1bps QoQ). Meanwhile, non-II jumped 32% YoY (+12% QoQ) from stronger treasury and markets income (flows as well as trading gains). Fee income also grew by a decent 15% YoY (flat QoQ), with both retail and markets-related fee income having had a good start to the year. Despite the strong operating income growth, CIR was stable YoY at 45.8% (4Q23: 47.8%) as opex rose 12% YoY (flat QoQ) on cost inflation and the impact of salary revisions for unionised employees. Consequently, sector PIOP was up 11% YoY (+9% QoQ). Credit cost was slightly higher at 22bps (1Q23: 20bps; 4Q23: 30bps) although sector GIL was broadly stable QoQ and YoY. Sector GIL ratio stood at 1.48%, while sector LLC was at 109%.

• Briefing highlights. Banks continue to appear guarded with respect to the macroeconomic outlook, citing factors such as geopolitical uncertainties, a higher-for-longer global interest rate environment, inflationary pressures and, domestically, the normalisation of interest rates, among others. That said, we note optimism on NIMs ahead as banks continue with efforts to lower funding cost and improve asset yields. As for loans, demand remains supported by retail loans, SMEs, and the rollout of infrastructure projects, but some banks could pare back growth in the quarters ahead to conserve capital and if margins are too thin. Also, some banks mentioned that capital markets-related fee income and trading gains are harder to forecast, as these depend on market opportunities – implying that 1Q24 non-II may be challenging to repeat. Finally, while there were upticks in GIL for the retail and SME portfolios, overall asset quality continues to hold up. This, coupled with overlay buffers in banks’ books, should help keep credit cost in check.

• FY24-25F sector net profit relatively unchanged. We still expect the sector to post 5-6% YoY net profit growth in FY24 and FY25 (FY23: +15%) on the back of a NII rebound from stabilising NIM and continued loan growth. We assume credit cost stays broadly stable but, despite the strong start to nonII, also expect a moderation in growth to 6% YoY (2023: +30%).

Source: RHB Securities Research - 6 Jun 2024