PETALING JAYA: The banking sector is expected to look positive in the near term after experiencing a sluggish month in credit growth in September.
Affin Hwang Investment Bank Research (Affin Hwang Research) believes there is upside potential for the sector, mainly driven by a boost in fund-based income through net interest margin (NIM) management and capital market-driven fee income.
In addition, the research house pointed out that the global easing cycle boosted market gains, while higher foreign and domestic direct investments as well as implementation of structural reforms helped to sustain investor confidence.
In September, the domestic banking sector saw a moderation in the growth rate of selective sectors such as manufacturing, construction and the non-small and medium enterprise (SME) segment.
Affin Hwang Research said the overall approval rates for business and consumer loans have been consistent at 51%, but saw a pullback in loan applications (business and households) in September.
It added there was a decline in the bank’s average lending rate to 5.23% (down three basis points (bps) month-on-month and a fall of 26 bps year-on-year), implying rising competition.
“Banks are gearing towards higher price-to-book value (P/BV) multiples. We remain confident in the banking sector’s 2024-26 earnings outlook and believe that banks may continue to rerate to higher P/BV multiples from 1.11 to 1.17 times to 1.3 to 1.4 times, through potential return on equity (ROE) expansion towards 11% to 12%,” the research house stated in a recent report on the sector.
It anticipates earnings momentum to pick up in 2024-26 on the back of more robust loan growth.
The research house said growth will be supported by favourable economic conditions and the acceleration of domestic infrastructure and construction projects.
Other catalytic factors include the Malaysia-Singapore Special Economic Zone, renewable energy investments under the National Energy Transition Roadmap and recovery in the global semiconductor market.
“New thematic opportunities for the banking sector include looking east to the Borneo states of Sarawak and Sabah as well as on food security under the Fourth Industrial Revolution,” Affin Hwang Research added.
It said the key drivers to the sector’s earnings growth included operating income expansion (led by fund-based income) amidst stable net credit charges and cost-to-income ratio.
The research house added households’ debt-servicing capacity, which stood at 35% as at December 2023, remained supported by favourable labour market conditions and wage growth.
“Whilst the business operating outlook turns more upbeat, we expect the system gross impaired loan (GIL) ratio to gravitate towards 1.5% by end-2024.
“We project NIM to average at 2.09% to 2.11% from 2024 to 2026 on the back of loan growth at 6.5% per annum (under review), as NIM pressure started building up due to rising competition for loans,” it said.
The research house reiterated its “overweight” stance on the banking sector, selecting CIMB Group
Holdings Bhd and Malayan Banking Bhd (Maybank) as its top buys.
It has a target price (TP) of RM9 per share for CIMB and is positive on the banking group’s ROE optimisation strategy and Asean exposure, as it benefits from robust economic growth in Indonesia and Singapore.
It has a TP of RM12.10 a share for Maybank given its robust deal pipeline and its scaling up in the mid-market segment and attractive dividend yields of 6.1% to 6.3%.
