• OVERWEIGHT, Top Picks: AMMB, Alliance Bank Malaysia (ABMB), CIMB and Hong Leong Bank (HLBank). We think market volatility will likely persist amid uncertainties with respect to US policies and the US Federal Funds Rate (FFR) trajectory, among others. Malaysia banks could offer investors a good defensive option to tide through this. Valuations (AMMB, ABMB) and capital management potential (AMMB, CIMB) underscore our stock-picking framework, while we like HL Bank for its defensiveness.

• Downside risk to sector earnings looks contained… Sector earnings should prove defensive, with Malaysia banking stocks under our coverage (MY Banks) being largely neutral to US FFR cuts and FX movements. In the past, the key drags to sector earnings growth tend to be NIM and/or credit cost (CoC). Banks managed NIM well in 2024 on liquidity and funding cost management, but with the sector LDR creeping up (latest sector and system LDR is at 93%and 88%), there may not be much room for them to trim deposit rates if loan demand is robust. The saving grace: With a stable asset quality outlook and a number of banks still holding on to healthy management overlays, there could be continued management overlay reversals to help mitigate potential NIM pressure and support bottomline growth.

• …while dividend yields still look attractive… The sector offers a FY25F dividend yield of over 5%.We think this is attractive, and there could be room for yields to compress further. Furthermore, amid a stable macroeconomic outlook, better visibility on Basel III reforms, and/or strong capital generation by some banks, these would be positive for dividend payouts and capital management initiatives. Basel III reforms will be implemented in stages, with operational risk set to go live in 2025. The impact looks manageable, with banks guiding for a small negative impact to CET-1 ratio.

• … with room for valuations to rerate from FII inflows. Finally, the sector offers investors leverage to foreign institutional investor (FII) inflows – given that banks, as liquid, large cap stocks, will likely be beneficiaries. Apart from that, some banking groups are set to unveil their next mid-term strategic plans next year. We think investors will be watching out for the new ROE targets, with credible ones aiding in the valuation rerating.

• 3Q24 earnings season wrap. Of the eight Malaysia banks we cover, six posted results that met our expectations. Affin’s 3QFY24 were a beat, on loan impairment writebacks while BIMB’s results missed estimates due to its softer-than-expected non-financing income. 3Q24 sector PIOP rose 4% QoQ (+9% YoY) on healthy topline growth (NIM expansion and higher non-II QoQ) and positive JAWs as opex was contained. Sector credit cost stayed flat QoQ as some banks continued with overlay reversals and, hence, overall sector PATMI grew by a very decent 5% QoQ and 10% YoY.

• FY24-26F sector net profit nudged up by 1% pa during the earnings quarter, after updating for the reported results and housekeeping. We now expect sector FY24 PATMI to rise by 7% YoY (from +6% YoY) but still estimate FY25-26 bottomlines to grow by 5-6% YoY. 

Source: RHB Securities Research - 10 Dec 2024