PETALING JAYA: The potential write-back in management overlay could boost the earnings outlook for the banking sector in Malaysia.
According to CGS International (CGSI) Research, eight banks in the country are still sitting on huge management overlay totalling RM5.33bil as at end-July 2024.
Among these, the highest management overlay was that of Malayan Banking Bhd
(Maybank) at RM1.7bil, followed by Public Bank Bhd at RM1.62bil.
CGSI Research estimated that every 10% write-back in overlay would increase the sector’s net profit (excluding CIMB Group Holdings Bhd) by 1.4%.
“The impact on net profit would be the largest for Affin Bank Bhd at 6.9% as it ramped up its management overlay in the second half of 2022 (2H22) to RM615mil to increase its loan loss coverage to above 100%; its management outlay remained high at RM427mil as at end-June,” the brokerage said.
“On the flip side, the impact from the 10% write-back in management overlay would be the smallest for both RHB Bank Bhd and Bank Islam (M) Bhd at only 0.7% of net profit as they have significantly reduced their management overlay over the past one to two years,” it added.
CGSI Research noted that write-back in management overlay would have increased banks’ net profits by 2.4% in 2023, 2.2% in the first quarter of 2024 (1Q24) and 1.9% for 2Q24.
“Going forward, we expect the quarterly write-back in management overlay in the next few quarters to be at around RM200mil,” it said.
“Based on this, we estimate the write-back in management overlay to lift banks’ net profits by around 2% in in 2H24 and 2025,” it added.
CGSI Research added the write-backs could come from those banks that have high levels of management overlays, including Public Bank, AMMB Holdings Bhd (the holding company of AmBank) and Affin Bank. It saw the potential for Hong Leong Bank Bhd (HLB) to start to write-back some of its management overlay as the bank stated that it could review its position on this.
The research house noted HLB has been maintaining its management overlay at RM574mil from June 2023 to June 2024.
As for Maybank’s management overlay of RM1.7bil, CGSI Research said if the bank started to wind down its position in this, the total quarterly write-back in management overlay for banks could surpass RM300mil.
Nevertheless, it said, the group had not indicated any plan to do so.
CGSI Research reaffirmed its “overweight” stance on the banking sector.
“Apart from the potential continuous write-back in management overlay, the other re-rating catalysts for us to maintain our ‘overweight’ call on banks include better outlook for net interest margins and potential increase in dividend payout ratios due to the capital management initiatives by most banks,” it explained. CGSI Research’s top picks for the sector are HLB and Public Bank.
It said the potential downside risks for the sector included weaker-than-expected economic growth in 2024 to 2025, as this could cause banks to register higher-than-expected loan loss provisions and softer loan growth.
In addition, it added, any upturn in inflation and higher interest rates following the series of interest rate hikes in 2022 to 2023 could be detrimental to banks’ loan growth and asset quality.
“Deposit competition among banks remains elevated, although, based on our observation, this has subsided somewhat in the past one to two years.
“Any protracted or escalating deposit competition could lead to a further increase in banks’ cost of funds, exerting pressure on banks’ net interest margins,” CGSI Research said.
