Review of 1Q 2024

The banking sector reported encouraging 1QCY24 results, with profits largely meeting expectations for all banks under coverage. The combined net profit for these banks increased by 5.7% QoQ and 7.4% YoY, reaching RM8.6bn. The total income for banks under coverage grew by 5.0% QoQ and 11.2% YoY, driven by a turnaround in NII, which increased by 2.7% YoY after four consecutive quarters of decline. QoQ, NII rose by 1.5%. Contributions from Islamic Banking operations also improved. Non-interest income (nonNII) remained robust, increasing by 16.6% QoQ and 28.9% YoY to RM6.3bn, primarily due to higher trading and investment income. Notably, the sector's core fee income continued its upward trend for the third consecutive quarter, rising by 14.8% YoY (vs 4Q23: +9.8% YoY, 3Q23: +11.3% YoY).

Next, the overall asset quality remained healthy as the bank's average gross impaired loans (GIL) ratio improved slightly to 1.58% in 1QCY24 vs. 1.59% in 4QCY23 and 1.66% a year ago. The total impaired loans for all banks under our coverage stood at around RM32.4bn, 1.2% YoY lower than RM32.8bn in 1QCY23. Despite that, loan allowances accelerated by 18.5% YoY (-23.7% QoQ). The sector’s average loan loss coverage (LLC) fell to 113% from 132% in 1QCY23. Finally, the banking system remains well supported by substantial capital and liquidity reserves during the quarter under review, with the CET1 and total capital ratio at 14.0% and 17.5%, respectively. 1Q CY24 results met expectations Turnaround in NII, Fee income on upward trend Healthy asset quality Supported by more than sufficient capital and liquidity buffers

Key Drivers for the Banking Sector in 2H 2024 Are as Follows:

1. Operating income to improve

2. Supported by healthy asset quality

3. Backed by ample capital and liquidity buffers

1. More robust loan growth and stable margins

We raise our loan growth forecast for 2024 from 5.8% to 6.1%, underpinned by increases in consumer and business loans of 6.3% (from 5.9%) and 5.9% (from 5.6%), respectively. According to Bank Negara Malaysia (BNM), total loans and advances advanced 6.0% YoY and 0.1% MoM in April 2024. The business segment upheld a robust growth trajectory, to improve by 5.4% YoY (-0.3% MoM). The improvement in business loans is noteworthy, rising at a YTD growth rate of 1.0% vs a contraction of 0.1% in April 2023.

By sector, only three major sectors experienced a YoY loan contraction, compared to six in our last review, indicating a broader economic improvement compared to December 2023. We believe the government's ongoing initiatives to stimulate investment activities should augur well for the economy, with construction and infrastructure projects like the MRT3, Penang LRT, Kuala Lumpur-Singapore high-speed rail, and significant flood mitigation efforts driving growth. Additionally, the National Energy Transition Roadmap (NETR) is set to boost renewable energy investments, attracting both domestic and foreign interest. Key economic indicators, such as a business loan approval rate of 56%, exceeding the 10-year average of 49%, reflect banks' increased willingness to finance due to improved asset quality and sufficient capital and liquidity. This, combined with a stable interest rate environment, suggests a continued rise in demand for business loans in the coming 6 to 12 months.

Consumer loans continued to demonstrate remarkable resilience YTD. According to BNM, total consumer loans accelerated by 6.5% YoY (+0.4% MoM), buoyed by the steadfast pillars of mortgages, hire purchase (HP), and credit cards. Residential Mortgages, which account for a sizeable chunk (around 64%) of total consumer loans, continued to support growth in the segment, increasing at a more robust pace of 7.5% YoY (April 2023: +6.7% YoY). HP loans also climbed at a healthier rate of 10.1% YoY (April 2023: +8.4% YoY), while the yearly drawdowns for credit cards and loans for personal uses broadened by 8.9% YoY (April 2023: +16.7% YoY) and 5.7% YoY (April 2023: +2.7% YoY). However, drawdowns for the Purchase of Securities declined again by 10.3% YoY (April 2023: -5.4% YoY).

The healthy BNM consumer data aligns with the recent 1Q results announced, where banks under our coverage collectively surpassed BNM’s rate to increase by 8.0% YoY (+1.7% QoQ). For the banks under our coverage, demand for consumer loans remained robust, particularly in hire purchase (+10.2% YoY), mortgages (+8.9% YoY), personal use (+13.6% YoY), and credit cards (+12.1% YoY). We maintain a positive outlook, anticipating that loan demand in the consumer segment will continue to thrive, driven by expectations of a recovering labour market in Malaysia, the introduction of a progressive wage system starting from June 2024, and the implementation of various assistance programs for the lower to middle-income group under Budget 2024. That said, we believe that banks with substantial consumer loans, such as Public Bank, Hong Leong Bank, and Affin Bank, are well-positioned to enjoy steady demand driven by mortgages, hire purchases, and credit cards.

Taken together, we project Net interest income (NII) to grow by 2.2% in CY24 after contracting by some 5.2% in CY23. Islamic Banking operations' contributions are also expected to rise at a stronger pace of 5.8% YoY in CY24, vs growth of 0.7% in CY23. To recap, the NII contraction in CY23 was mostly due to Net Interest Margin (NIM), which declined by a steep 19 bps YoY due to 1) repricing of deposits and 2) ongoing deposit competition. That said, growth in the sector's total interest expense continues to accelerate at a faster 26.7% YoY in the 1Q of CY24, surpassing the 15.5% YoY increase in total interest income.

Going forward, we foresee more stable NIM movement, as seen in the slight one bp QoQ expansion in the average NIM to 1.97%. We expect steadier NIM (-2 bps YoY) to be underpinned by the repricing of fixed deposits (FDs) at lower rates, along with encouraging signs of more rational deposit competition in recent quarters. Furthermore, the accumulation of CASA deposits strengthened by 0.9% QoQ and 7.0% YoY, while costlier FD balances expanded at a slower pace of 5.1% YoY.

We anticipate another year of healthy growth prospects for non-interest income (non-NII), which we forecast would improve by another 15.9% YoY in CY24 after accelerating by 25.0% in CY23. As seen in the recent 1Q CY24 results performance, non-NII remained robust, increasing by 16.6% QoQ and 28.9% YoY to RM6.3bn, primarily due to higher trading and investment income. Notably, the sector's core fee income continued its upward trend for the third consecutive quarter, rising by 14.8% YoY (vs 4Q CY23: +9.8% YoY, 3Q CY23: +11.3% YoY), buoyed by an improvement in capital markets. Corporate bond markets, driven by an expansionary Budget 2024 initiatives, as well as various infrastructure projects and NETR investments, appear to be gaining momentum. Capital market activities have improved in the first four months of 2024, with net funds raised by the private sector through new shares and debt securities issuance amounting to RM34.2bn (excluding redemptions) vs RM29.3bn YTD in April 2023.

2. Supported by Healthy Asset Quality

As expected, provisions continued to soften in CY23, given that banks under our coverage had proactively shored up around RM8.2bn (based on December 2023) in provisions throughout CY20 and CY21 to buffer against potential credit losses. Credit charges have since softened from 40.8 bps in CY22 to 32.2 bps in CY23. We forecast further improvements of 29.9/29.5/28.6 bps in CY24/25/26. Based on our latest checks, total overlays remain largely intact at around RM7.8bn.

Furthermore, the average gross impaired loans (GIL) ratio has shown a positive trend, improving slightly to 1.58% in 1QCY24 compared to 1.59% in 4Q CY23 and 1.66% a year ago. The total impaired loans for all banks under our coverage stood at around RM32.4bn, 1.2% YoY lower than RM32.8bn in 1Q CY23. Despite this, banks are maintaining a vigilant stance on asset quality as the average loan loss coverage (LLC) fell to 113% from 132% in 1Q CY23. However, given the benign credit environment, we believe this risk is manageable. Nevertheless, we note that some banks under our coverage, such as AMMB and RHB, may need to bolster their reserves, as their LLCs are below 100%. On the other hand, Public Bank, Hong Leong Bank, and Maybank reported LLCs that were above their peers at 169%, 154%, and 121%, respectively, indicating better asset quality health. Overlay buffers intact Slight improvement in impaired loans

3. Backed by Ample Capital and Liquidity Buffers

Elsewhere, the sector remained supported by ample capital and liquidity buffers well above regulatory requirements. Based on BNM's latest April 2024 data, the sector's CET1 and Total Capital Ratio stood at 14.5% and 18.1%, respectively, little changed compared to 14.8% and 18.6% a year ago. BNM also noted that banks maintained healthy capitalisation levels, sufficient to withstand potential shocks and continue supporting credit flows to the economy. Additionally, liquidity is adequate, as the current LCR in the system stood at around 152%.

As expected, dividend payout continued to normalise and improve for some banks under our coverage. During the quarter, AMMB proposed a final dividend of 16.6 sen per share, bringing the total dividend for FY24 to 22.6 sen per share, translating to a higher payout ratio of 40% versus 35% in FY23. Alliance Bank proposed a second interim dividend of 11.45 sen, bringing the total FY24 dividend to 22.3 sen, reflecting a stable payout ratio of 50%. Banks continue to be backed by ample capitalisation and healthy liquidity Higher dividend payouts

Recommendation

Looking ahead, the banking sector is expected to grow by 4.1% in CY24 and 5.5% in CY25, reaching RM34.0bn and RM35.9bn, respectively. Based on rising loan growth, stabilising NIM, the potential for higher NII, gradual acceleration in fee income, and healthy capital and liquidity buffers, we maintain an OVERWEIGHT stance on the banking sector. Potential downside risks include a deterioration in asset quality due to external shocks, softer contributions from overseas operations, and sustained high overhead expenses. Despite these risks, the sector's outlook remains positive, supported by solid performance indicators and growth prospects.

Stock Picks

Public Bank Berhad (PBB) is aggressively defending its market share, particularly in the SME and business segments, with increased non-residential property loans and HP activities, while residential mortgages moderate. As of 1QCY24, its gross impaired loan ratio is low at 0.62%, with a robust loan loss coverage of 168.7% and a substantial RM1.7bn management overlay buffer. With a strong CET1 ratio of 14.5% and rising dividend payouts (51.4% in 2019 to 55.5% in 2023), PBB can further increase dividends. It is also wellpositioned to attract foreign investors, with current foreign shareholding at 24.6%, supported by strong asset quality and a superior ROE of 12.4%. We value PBB at RM4.90. Our valuation is based on an implied PBV of c. 1.53x based on the Gordon Growth Model.

Alliance Bank Malaysia Berhad (ABMB) Has Demonstrated Robust growth across various segments, driven by an increase in business loans. Notably, efforts to enhance non-NII have yielded significant improvements in treasury and trade activities. The strategic direction under the leadership of CEO Mr. Kellee Kam, who brings valuable insights and industry knowledge, is focused on driving growth and innovation in the corporate banking segment. Operationally, ABMB’s loans expanded by 12.9% YoY, surpassing the 8-10% guidance, driven by business loans, alongside an 18.0% YoY increase in treasury assets. Financially, ABMB has shown strength with NIM at 2.48% and ROE at 10.1%, with management emphasizing quality over quantity. The ACCELER8 2027 Strategy is on track, as evidenced by impressive new customer acquisitions. Our valuation of ABMB is at RM4.30, based on an implied PBV of c. 0.93x using the Gordon Growth Model.

Source: TA Research - 2 Jul 2024