Malaysian banking sector shows resilience despite economic headwinds
PETALING JAYA: As global markets grapple with recessionary fears, investors have increasingly turned toward financial stocks for higher yields. In this environment, Malaysia’s banking sector has demonstrated significant strength through robust earnings and a defensive market position. Although the reopening of the economy in 2022 saw an initial rise in share prices, analysts maintain that current valuations remain attractive. Kenanga Research noted that the outlook for the near term is supported by solid financial results following the fourth quarter of 2022. The sector faces challenges such as declining loan growth and shrinking interest margins, yet non-interest income is expected to improve overall performance.
Analysts maintain overweight ratings on banking industry
Kenanga Research continues to hold an overweight rating on the banking industry following the earnings season that concluded in late 2022. While some concerns exist regarding potential decreases in near-term interest income due to tighter lending conditions, other factors are driving growth. Decreasing credit costs and effective taxation are anticipated to fuel overall earnings expansion for the sector. The research group identified significant asset quality drags as the primary threat, noting that these risks could be exacerbated by a global recession or disruptions in supply chains. Despite these potential headwinds, higher dividend yields from current price points are expected to keep investor interest high for the coming quarters.
Top picks include CIMB and Maybank for stability and growth
The research firm highlighted specific institutions within the sector that offer distinct advantages for investors looking at the first quarter of 2023 timeframe. CIMB Group Holdings Bhd was selected for its protective non-interest income derived from trading results endorsed by regional organizations. Among large-cap banks, the group maintains one of the largest books of current account savings accounts. Maybank continues to be identified as a top dividend pick with yields ranging between 7 percent and 8 percent. This institution offers safety to investors seeking stable returns while benefiting from the advantages of the economy reopening. As the market share leader in loans and savings, it holds a prominent position in the domestic landscape.
Small-cap leaders and valuation metrics remain attractive
Alliance Bank Malaysia Bhd stands out as the leader among small-cap banks with a significant focus on lending to small and medium-sized enterprises. The bank holds 30 percent of the loan share in this sector, which is predicted to be its area of maximum growth. Its CASA composition reaches 50 percent, providing a stable funding base. Although its return on equity figures differ from larger peers, with rates around 10 percent compared to 6 percent for others, its fundamentals remain comparable. Maybank Investment Bank Research reported that dividend payout ratios in the financial year 2022 were returning to pre-pandemic levels. The sector trades at a projected price-to-book value of just 0.9 times with an average return on equity of 10.5 percent. Sector dividend yields are attractive, sitting at 5.4 percent for fiscal year 2023 and rising to 5.7 percent in 2024.
Profit forecasts and credit cost management strategies
Kenanga Research forecasts a 2.6 percent increase in operational profits for the industry in 2023, with cumulative core net profits expected to rise by 14 percent. There is room for improvement should credit costs decline more quickly than anticipated. Increased capital market activity and a drop in bond yields are expected to drive a pickup in non-interest income, although overheads should continue growing at a modest rate of 4 percent to 5 percent. Maybank Investment Bank Research has issued buy recommendations for CIMB, ABMB, AMMB Holdings Bhd, RHB Bank Bhd, and Hong Leong Financial Group. The firm expects interest margins to compress by approximately seven basis points on average while domestic industry loan growth moderates from 5.7 percent to 4.8 percent. Banks are maintaining the majority of their pre-emptive provisions, which totaled roughly RM8.5 billion as of the end of 2022, down from RM9.9 billion at the end of 2021. Loans under repayment assistance average about 3 percent of total loans. If a 20 percent default rate is assumed with a loan loss given default rate of 30 percent on these loans, banks’ pre-emptive provisions would comfortably cover defaults ranging from 171 percent to 656 percent. The research company continues to impute a conservative credit cost assumption of 32 basis points and 27 basis points in 2023 and 2024 respectively against the pre-pandemic average of 28 basis points from fiscal years 2017 and 2020.
