Maybank Investment Bank Bhd (Maybank IB) expects 2023 operating profit for the Malaysian banking sector to contract 2% on the back of net interest margin compression, although they also project core net profit growth of 9%.
“We expect return on equities to be relatively stable at 10% this year and valuations are undemanding. Dividend yields of more than 5% provide support. BUYs maintained on CIMB, AMMB, ABMB, HL Bank, HLFG and RHB,” said Maybank IB.
Deposit competition was vicious in quarter one 2023 and net interest margins contracted 30 basis points quarter-on-quarter for banks in Maybank IB coverage.
Moreover, operating expenses gathered pace with the opening up of the economy. As a result, quarter one 2023 aggregate core operating profit was relatively flat year-on-year.
Nevertheless, it was still a decent quarter for banks, for non-interest income held up well. Other provisions were lower year-on-year and associate income jumped 40% year-on-year. Cumulative core pretax profit rose 8% year-on-year while core net profit jumped 16% year-on-year in the absence of Cukai Makmur.
“We now expect 2023 operating profit to contract 2.4% from +2.6% previously, taking into account 5% domestic loan growth, 14 basis points net interest margin compression year-on-year, and a higher cost/income ratio of 45% versus 43% in 2022,” said Maybank IB.
Operating profit growth in 2024 estimate of 4.7% is predicated on 4.5% loan growth, stable net interest margins, and a still elevated cost/income ratio of 45%.
2023 aggregate core net profit growth is lowered to 9.2% from 14% amid slower topline growth, average credit costs of 29 basis points and lower tax rates.
“We project core net profit growth in 2024 of 6.5%, supported by a lower, but still elevated credit cost of 26 basis points,” said Maybank IB.
Most banks have yet to revise their return on equity targets and remain relatively optimistic that their targets are achievable, despite the hefty net interest margin compression in quarter one 2023. This optimism is largely predicated on an easing of deposit competition, and thus better net interest margins, in the second half of 2023.
Note the still robust treasury income and/or lower credit cost for the year. While Maybank IB is less sanguine and maintains return on equity forecasts that are below management’s guidance, they expect return on equities to be relatively stable, improving marginally to 10.0% in 2023 from 9.9% in 2022, and to 10.1% in 2024 estimate.
