The Malaysian Banking Sector survived the NIM contraction in 2Q23
The Second Quarter (2Q23) was not all sunshine and rainbows for Malaysian banks despite the stellar yoy core net profit (CNP) growth of 21.6% during the quarter, underpinned by (1) the non-recurrence of Cukai Makmur (CM) taxation, (2) 47.2% yoy surge in non-interest income (NOII), and (3) 13.7% yoy drop in loan loss provisioning (LLP).
CGSCIMB said in a note today (Sept 26) that in ( fact, banks suffered another round of contraction in net interest margin (NIM), with 2Q23 NIM down 3bp qoq and 19bp yoy after a 22bp qoq contraction in 1Q23.
What are the expectations for 3Q23F?
CGSCIMB forecasts total CNP of RM6.5bn-6.6bn in 3Q23F for Malaysian banks under our coverage, representing growth of 1-4% qoq and 7-9% yoy.
This is underpinned by their expectation of a resumption in net interest income growth on stabilised NIM and yoy loan growth of around 4% in 3Q23F and they also expect banks’ 3Q23F NOII to be close to 2Q23’s level of RM5.43bn but with lower yoy growth at mid-single-digit rates vs. 2Q23’s 47.2%.
Meanwhile, the firm sees room for banks to reduce their total LLPs in 3Q23F from the level of RM1.34bn in 2Q23 as the banking industry’s gross impaired loan ratio had stayed stable at 1.76% as at end-Jun 23 and end-Jul 23, while several banks could record management overlay write-backs, in our view.
Projecting CNP growth of 14.8% in 2023F and 8.3% in 2024F
For the banks under coverage, CGSCIMB projects CNP growth of 14.8% in 2023F and 8.3% in 2024F on the back of increases of 2-4% in net interest income and 7-14% in NOII.
They also forecast a 2.8% decline in LLP for 2023F but an 11.7% jump in 2024F (as 2023F LLP is reduced on write-backs in management overlay in 1H23) and see the non-recurrence of CM taxation as another earnings catalyst for banks in 2023F.
CGSCIMB Reaffirm Overweight on banks
CGSCIMB reaffirms their Overweight rating on Malaysian banks, predicated on the potential partial write-back in management overlay (which stood at a whopping RM6bn at end-Jun 23) and capital management by several banks that could lead to an increase in dividend payout ratios and expansion in ROE over the longer term.
Potential downside risks are deterioration in asset quality, and deterioration in loan growth. The firm’s top pick for the sector is RHB Bank premised on its attractive valuation (CY24F P/E of 7.1x vs. sector’s 9.6x) and dividend yield (of 6.5% for CY23F).
