RHB Research forecasts that the sector's earnings may rise by 15.6% year-on-year to RM31bil in financial year 2023 on further expansion of NIMs due to expectations Bank Negara would raise the overnight policy rate two to three more times this year. — Bloomberg
PETALING JAYA: RHB Research remains “overweight” on the banking sector on expectation that it will continue to enjoy earnings growth from improved net interest margins (NIMs) and core fee income.
In a report yesterday, the research house said the sector would also benefit from a normalising cost base and decent loan growth, underpinned by a resilient economy and labour market.
It forecast the sector earnings to rise by 15.6% year-on-year (y-o-y) to RM31bil in the financial year 2023 (up 7.6% to RM26.8bil in 2022).
RHB Research said this is on the back of a further expansion in NIMs enabled by expectations that Bank Negara would raise its overnight policy rate (OPR) by two to three more times this year, driven partly by the US Federal Reserve’s action to raise its fund rate by another 100 basis points (bps) to fight inflation.“The tailwinds from rapid rate hikes (100 bps in 2022 and possibly two to three more hikes in 2023 would support top line growth while the normalisation of credit cost would provide a further bottom line uplift.
“The sustained return on equity improvement, we believe, would see bank stocks outperform the broader market this year,” RHB Research said.
Local bank earnings are also set to get a boost from the absence of the “cukai makmur” and lower credit costs as impairment issues normalise to pre-pandemic levels, following the end of the borrower assistance programmes last year.
Despite the talk of recession in developed markets like the European Union and the United States, the report pointed out that country’s economy is expected to sustain growth at about 4% to 5% in 2023, driven by domestic demand as labour market conditions continue to improve and on the rollout of large infrastructure projects and higher inbound tourist numbers.
RHB Research noted that the cumulative 100 bps rise in rates in 2022 as well as possibly two to three more overnight policy rate hikes in 2023 would mean that banks’ NIMs could widen again in the fourth quarter of 2022, and likely into the first half of 2023.
“We expect the NIM tailwind to start dissipating in the second half of this year, as funding costs rise on the lag effect from deposits repricing, as well as increased competition for customer deposits,” it added.
It said the banking system loan growth would likely moderate to 5% y-o-y in 2023 from about 5.8% y-o-y growth in 2022, with demand for loans coming from the wholesale, retail and hospitality, financial services and manufacturing sectors, as well as residential mortgages.
“The higher interest rates, we believe, would be well absorbed, as borrowers’ cashflows have improved with the recovery in economic activities,” it said.
RHB Research noted that bank stocks ended 2022 with an 8.4% y-o-y gain versus the 0.9% dip in the FBM KLCI.
Its preferred picks are CIMB Group
Holdings Bhd with a target price (TP) of RM7, AMMB Holdings Bhd (TP: RM4.80) and Alliance Bank Malaysia Bhd (TP: RM4.40).
