PETALING JAYA: Despite acknowledging that the path forward for the third and final quarters of the year could see challenges to earnings, analysts are maintaining a cautiously hopeful outlook on the banking industry, underpinned by a number of factors.
Securities firm MIDF Research, although maintaining a “buy” call on banks, said in a note published yesterday that valuations are no longer as attractive following the recent share repricing of the sector.
While maintaining a largely positive perspective on banking counters, it has dampened its outlook compared to before, commenting that non-interest income (NOII) recovery would remain as the sector’s core earnings driver.
“Tailwinds have also softened, with net interest margin (NIM) recovery more gradual than expected, less optimistic loan growth prospects and banks’ decision to retain overlay provisions,” said MIDF Research.
Aside from that, the research unit is anticipating earnings performances to be leaning towards the negative.
It observed that domestic loan growth had expanded by a sluggish 0.8% for the second quarter of 2023 (2Q23) compared to the first, with growth in unsecured loans offsetting weakness in working capital numbers.
Moreover, the research house said: “While we expect smaller banks to continue registering high growth figures, there may be a smaller possibility that larger banks may be revising its loan growth figures – especially if foreign growth figures remain lacklustre. Banks which have front-loaded deposits may have an easier time managing this situation.”MIDF Research nevertheless retained “buy” calls on most of the banking counters under its coverage, while selecting Public Bank Bhd
and RHB Bank Bhd as its top picks, with respective target prices of RM4.76 and RM7.58.
Meanwhile, head of equity sales for Rakuten Trade Vincent Lau is a shade more optimistic, believing that the rate of non-performing loans (NPLs) had stabilised and that there is still upside to banking stocks, notwithstanding the aforementioned recent repricing of certain counters.
“Lately, we have also been seeing net buying from foreign funds on Bursa Malaysia, which has enjoyed a good run in the past month.
“The banking counters have the capacity to prop up the exchange given its heavy weightage,” he told StarBiz.Of interest, given that AMMB Holdings Bhd has published its results for its first fiscal quarter ended 1Q24 yesterday, which saw net profit contracting by 7.8% year-on-year, Lau is of the opinion that profitability for banks would remain strong.
“They are still showing decent profit numbers and with the country’s political stability improving further moving forward especially from the current quarter, we should see banks continuing to perform well,” he said, before adding that he does not see any further tweaks in Bank Negara’s overnight policy rate (OPR).
Lau picked Malayan Banking Bhd (Maybank) as his choice among a number of strong options, preferring the country’s largest lender for its positive yield and stable standing, as AMMB revealed it achieved a net earnings of RM378.4mil for the three months ended June 30, which also represented an 11.6% quarter-on-quarter decrease.Meanwhile, chief investment officer for Tradeview Capital Nixon Wong is of the opinion that the NIM of the banking industry will stabilise in 2Q23 and 3Q23, following the repricing of a majority of fixed deposits (FD) early this year, coupled with the easing in competition among banks for FDs.
“In addition, we believe banks should able to deliver a more stable return in the remaining quarters as well, underpinned by Malaysia’s modest economic condition, the subsiding of domestic political risks, and a relatively stable OPR outlook,” he pointed out, concurring with Rakuten’s Lau on the larger domestic macroeconomic picture.
Reinforcing his positive stance on the industry, Wong is expecting improvement in NOIIs as well, as he said central banks no longer need to hike rates aggressively, in contrast to last year.
He said that year-to-date, the 10-year Malaysian Government Securities (MGS) yield has ranged between 3.6% to 4.1%, compared to the wider the range in 2022 of between 3.6% to 4.6%.
As such, he anticipates this contraction in yield range to result in healthy income growth from non-lending banking products.
He noted: “At the same time, we are not anticipating any substantial changes at the moment regarding gross impaired loans. This is supported by our modest economic situation and a healthy job market.”
The improving domestic scenario has led Wong to opine that the urgency to raise OPR in the remaining months of 2023 is less compared to what he expected earlier this year, while the potential recovery of foreign fund inflow should also boost investment income in the banking industry as well.
Concurrently, MIDF Research has also placed a “buy” call on Maybank and CIMB Group Holdings Bhd – with respective target prices of RM9.28 and RM6.39 – but interestingly, the research outfit is anticipating the latter to outperform other banks in its coverage for 2Q23.
MIDF Research said CIMB indicated stronger NOII for the quarter in review, with its Indonesian arm CIMB Niaga also posting sizeable uplift from NPL sales.
It is expecting loan growth for CIMB to remain intact, buoyed by overseas wholesale drawdowns.
