PETALING JAYA: Despite uncertainty in the global economy, Malaysia’s banking system is expected to remain resilient to any potential near-term risks through 2023, thanks to its strong capital buffer.
Lending support to this view are the county’s relatively stable domestic economic conditions, which help ensure the asset quality of banks stay healthy.
Citing data from Bank Negara’s Financial Stability Review for the first half of 2023, Hong Leong Investment Bank (HLIB) Research noted the country’s banking system, which stayed fundamentally strong despite heightened global market volatility, was capable of weathering any potential systemic shocks.
“Both the household and business segments have adequate financial buffers to sail through tough times,” the research house said.
“In addition, risks are well contained and hence, financial stability is expected to stay intact this year,” it added.
Nevertheless, HLIB Research reiterated a “neutral” stance on the banking sector, pointing out that the sector’s risk-reward now was more balanced, with no new positive catalysts to spur share prices significantly higher.
“Also, we are projecting sector profit to grow at a slower rate of 5% for 2024 and 4% for 2025 versus 13% in 2023, which lags the broader market as well, as Bursa Malaysia is seen to rise at a quicker pace of 8% in 2024,” it said.
HLIB Research attributed the expected slower profit growth for banks to the sluggish recovery in net interest margin, moderating non-interest income growth, and the absence of net credit cost writebacks.
“Regardless, valuations are not excessive and hence, we feel it is too premature to turn full-on bearish,” it explained.
Among the banks under its coverage, HLIB Research had “buy” calls for Public Bank Bhd
, AMMB Holdings Bhd, Alliance Bank Malaysia Bhd and Bank Islam Malaysia Bhd.
Similarly “neutral” on the banking sector, Public Investment Bank (PublicInvest) Research said while it saw no threats to the near-term prospects of the industry, there appeared to be limited rerating catalysts to significantly lift banks’ share prices.
“Domestic market stress levels have declined since mid-March, as contagion fears tied to the global banking sector stress subsided, though there has been a slight uptick in recent months due to renewed expectation of the US Federal Reserve keeping policy rates higher for longer, in addition to the slower-than-expected pace of China’s economic recovery,” the brokerage said.
All said, it noted, market stress levels were well below the peak observed at the onset of the Covid-19 pandemic in March 2020.
“Businesses have remained relatively resilient amid differing challenges such as higher input costs and weak external demand,” PublicInvest Research said, pointing to the segment’s healthy overall debt-servicing capacity, with median interest coverage ratio at 5.5 times, well above the prudent threshold of two times, while the share of firms at risk had also declined to 26% in 1H23 from 26.5% in 2H22.
As for the household segment, PublicInvest Research said further improvements in income and labour market conditions were expected to continue to underpin resilience.
“Various measures of households’ debt repayment abilities indicate limited new risks, though banks do expect some deterioration in asset quality among higher-risk borrowers amid higher borrowing costs, and as existing repayment assistance programmes extended during the pandemic also come to an end,” it explained.
It noted household debt-to-gross domestic product was broadly stable at 81.9% as compared to 81% in 2H22.
Also, banks had continued to exercise sound lending standards, with median debt service ratios of newly-approved and outstanding household loans at 42% and 36%, respectively in 1H23, as compared to 43% and 37%, respectively in 2H22, thus, preserving healthy buffers for households to support loan servicing.
Overall, PublicInvest Research said relatively steady economic conditions would ensure banks’ asset quality would remain mostly intact, pockets of weakness notwithstanding. Its top sector picks were Malayan Banking Bhd and CIMB Group Holdings Bhd.
Meanwhile, RHB Research said the 1H23 Financial Stability Review showed most leading indicators were healthy, though the share of firms at risk in several sectors were still elevated vis-a-vis pre-pandemic levels. “Nevertheless, the central bank remains assured that the domestic financial system can maintain resilience in the face of macroeconomic headwinds,” the brokerage noted, adding that it was still “neutral” on the banking sector.
