HLIB Research has maintained a “neutral” call on the banking sector.
PETALING JAYA: Smaller and mid-sized banks are expected to benefit more from an upside bias to net interest margin (NIM) versus their larger counterparts as they are more susceptible to fixed-deposit (FD) competition.
NIM is what banks earn from customers from interest on their loans versus what customers get from FD interest.
Hong Leong Investment Bank (HLIB) Research in a report said banks can cut at least another 10 to 20 basis points (bps) from FD rates, given that NIM remains below the pre-pandemic level despite competition for FD market share having eased over the past six months.
“In August 2024, we saw banks were still pro-actively lowering their campaign FD rates (five bps to 10 bps) and we expect this effort to gradually continue,” it added.
It expects upside bias to NIM estimate next year that in its view would benefit mid-sized and smaller banks.
Changing its stance that a large NIM recovery would not be possible, it said “banks have either lowered their campaign or board FD rates to arrest NIM erosion and we observed that they have been broadly successful in executing their strategy”.
While promotional FD rates remain higher than board FD rates, the research house, which has maintained a “neutral” call on the sector, believes that the situation may shift to favour mid-sized and smaller banks.
As such, it has a new investment strategy to focus on mid and small-banks that are able to offer more favourable risk-reward opportunities compared to large banks that appeared to be fairly priced.
The research house now has “buy” ratings on RHB Bank Bhd for compelling dividend yield, laggard potential play and being an FBM KLCI component.
Other “buy” ratings include AMMB Holdings Bhd
for larger dividend payouts in the near future, Bank Islam Malaysia Bhd (BIMB) for attractive dividend yields and potential gains from the civil service pay increase and Alliance Bank Malaysia Bhd for effective business strategy execution, strong ESG initiatives and elevated loan-loss coverage.
Based on HLIB Research’s analysis, Affin Bank Bhd and BIMB have the largest bottom-line sensitivity to NIM movement, while Public Bank Bhd and CIMB Group Holdings Bhd have the smallest.
“So far, we have been conservative and projecting a mild NIM slippage of zero to one bps for financial year 2024 (FY24) to FY25. From our sensitivity analysis, we estimate that for every one bps expansion in sector NIM, banks’ earnings forecast could be raised by 0.9%,” it added.
The research house added that if NIM reverts to the pre-pandemic level by adding another 20 bps, there could be an upward adjustment to sector profit by 18% and this may translate to a return-on-equity uplift of 1.5 percentage point.
