Bank Negara Malaysia’s (BNM) confidence on the resilience of Malaysia’s financial system was revealed in the central bank’s Financial Stability Review (FSR) report evidenced by sound buffers and strict regulations preventing major fall-outs seen abroad.
Domestic players (systemic and non-systemic) are expected to see highly limited exposure to riskier trade partners (i.e. China and recently concerned Middle East markets). Barring unexpected turbulence in domestic sectors, it is expected for BNM to maintain the OPR at 3.00%, which is expect to persist till end-2024, cited Kenanga Research (Kenanga) in its Banking Sector Update today (Oct 10).
A Banking OVERWEIGHT call has been placed on the sector among reasons of affordability which could be the most immediate concern with possible targeted fuel subsidies likely to press certain demographics.
That said, BNM has opted to maintain its stress test parameters which it introduced in the 2HCY22 FSR as it believes the attached variables are sufficient in simulating upside pressures.
Kenanga’s focus on banks which are poised for attractive dividend-ROE expansion in the near-term under several tactical opportunities, being (i) CIMB (OP; TP: RM6.30) for forward earnings resilience and high prospective special dividends in the event of overlay write-backs, (ii) AMBANK (OP; TP: RM4.80) for possible resurgence of consolidation talks, and (iii) ABMB (OP; TP: RM4.30) for strong fundamentals comparable to large cap peers with a high exposure to SMEs which may benefit from revitalised economic activities.
Steady fort
Despite shocks in the global banking landscape, Malaysian banks had managed to fend off contagion risks, thanks to tight regulatory oversight from BNM which dictates strict adherence to liquidity requirements as well as credit buffers. While the worst could have well passed us, BNM has so far not indicated the need to relax standards for the sake of safeguarding the integrity of the financial system.
Immediate home ground threats remain to be inflationary pressures which may extend with the possible imposition of targeted fuel subsidies (pending clarity from the upcoming Budget 2024) while global factors such as unfavourable exposure to more volatile economies are expected to be insignificant.
These concerns arise from the fallout in China’s property markets as well as recent fluctuations in oil prices as ongoing conflicts may crimp its supply chain.
That said, as monetary policies seem to be effective at curbing inflation, Kenanga opines BNM is obliged to maintain OPR at 3.00% to combat pressures from possible unforeseen developments.
At the moment, banks continue to maintain a stable liquidity coverage ratio of 154% in Jun 2023 (Dec 2022: 152%) and total capital ratio of 18.5% (Dec 2022: 19.0%). Loan loss coverage ratio remains buoyant at 116% (Dec 2022: 119%) amidst a slight rise in gross impaired loans (GIL) to 1.8% (Dec 2022: 1.7%).
Unexciting but stable household sector. Jun 2023’s debt-to-GDP levels of 81.9% (Jun 2022: 84.4%, Dec 2022: 81.0%) is broadly stable but still below Jun 2021’s recent high of 90%. Kenanga believes that higher borrowing costs amidst moderate economic growth expectations could likely keep readings stagnant in the near-term. This may apply to flattish loan impairments as seen in the recent report, although they do anticipate delinquencies to improve following Apr 2023’s seasonal barriers.
Household debt servicing capacity also appears to be unmoved at 36% (Dec 2022: 37%) for outstanding household loans, which may serve as an indication that employment markets and income prospects are still supportive.
Business sectors still seeing risks but are contained. BNM pointed out that the sectors that are still deemed to be largely at risk are construction and manufacturing given that these areas will likely be pinned more greatly than others when faced with higher input costs and softening external demand.
That said, the interest coverage ratio for overall businesses is healthy at 5.5x in Jun 2023 with repayment assistance accounts continuing to see sequential declines to 5.4%, recently. On the other hand, GIL readings have remained mostly stable at 2.8%, slightly above the 2015-2019 average of 2.6%.
Overall, Kenanga continues to remain encouraged with the 1HFY23 FSR cementing the resilience of the banking sector. Certain corporates may have indicated a less cautious tone than others as seen in their appetite to write back management overlays, which they can gather now may be warranted.
However, the banks that continue to be prudent may still be preferred as not writing back on its excess provisions are not inhibiting sequential earnings growth. Kenanga noted that BNM did not refresh its stress testing parameters as risks appear fairly contained with banks continue to be well-capitalised across the board.
Maintain OVERWEIGHT for the Banking Sector
The call further cement Kenanga’s stance on the resiliency of the sector. That said, investor may be in the mood to cherry pick given that the sector had experienced a favourable recovery post-March 2023’s global banking sell-down and early-3QCY23’s foreign profit taking ahead of state elections.
Kenanga’s Top Picks: The research house continues to feature CIMB as they remain to be one of the best-poised players to demonstrate above-industry growth thanks to their enlarging regional footprint. On the other hand, CIMB’s sizeable overlay relative to earnings present some handsome translation to earnings and special dividends.
Kenanga also highlighted AMBANK as they believe its current fundamentals are highly supportive of healthier discussions for M&As, which have in the past been frequently considered. The group is also one of the leaders in terms of SME profile, which is touted as a high-growth segment that could accelerate market share growth for the group should we anticipate better economic prospects in the medium-term.
For smaller cap banks, Kenanga sees potential in ABMB to be a favourite as it is fundamentally comparable to larger cap peers in both dividend and ROE. The group’s strength lies in its high proportion of quality SME accounts which also led the group to maintain one of the highest NIMs amongst its peers.
RHB Research Malaysia Sector Update on the Banking sector today cited that most leading indicators were healthy, though the share of firms-at-risk in several sectors were still elevated vis-à-vis prepandemic levels.
Nevertheless, the central bank remains assured that the domestic financial system can maintain resilience in the face of macroeconomic headwinds.
RHB remails NEUTRAL with Top Picks being CIMB, Hong Leong Bank, and AMMB.
Non-households – resilient amid rising costs
Businesses continued to maintain interest coverage ratios above prudent levels, implying healthy debt servicing capability. This is in spite of rising input costs – ie raw materials, labour, and electricity – impacting profitability, especially in the construction, manufacturing, and real estate sectors.
While softer demand for loans from export-oriented businesses have been a slight drag on system loans growth YTD, the central bank is confident that the diversified nature of Malaysia’s trade can continue to support such businesses.
Households – No surprises
Household loans growth was a steady 5% YoY, while debt service ratios continued to hover at healthy levels. On asset quality, loans classified under Stage 2 (relatively higher credit risk) fell to 4.6% of total banking system loans, from 6.7% at end-Dec 2022 – this comes after an increasing number of accounts demonstrated consistent repayments upon exit from repayment assistance programmes. Take-up of new restructured or rescheduled (R&R) loans remained small, making up <1% of total banking system loans.
Updates on financial markets
In the wake of the banking crisis in developed economies from earlier this year, investor appetite for Additional Tier 1 (AT1) securities issued by domestic banks still appeared robust. The subdued Ringgit is not a big concern, as performance was affected by external developments, including renewed expectations of a higher terminal interest rate in the US and soft macroeconomic performance in China.
Nevertheless, the central bank is encouraged by the improved investor sentiment in the domestic equity market, as shown by the net inflow of non-resident funds in 3Q23. The intensity of deposit competition has waned from the levels seen between 4Q22 and 2Q23, and should remain manageable moving forward in the absence of expectations of further rate hikes.
Other highlights
Domestic banks’ exposures to the China real estate market is limited and well covered. Separately, exposures to geographies affected by the ongoing conflict in the Middle East are also minimal, though BNM remains watchful of spillover effects onto the Asian and global economies. The central bank is also developing a framework for Digital Insurance and Takaful Operators (DITO) licenses, which it hopes to publish in 1H24 in an effort to further promote financial inclusion.
CGSCIMB Sector note takes a positive view that the downtrend in the industry’s loan growth (from 5.2% yoy at end-Feb 23 to 4.2% at end-Jul 23) paused in Aug 23 as loan growth was sustained at 4.2% yoy at end-Jul 23 and end-Aug 23 (+5.3% yoy for household loans and +0.7% yoy for business loans at end-Aug 23).
This was not a complete surprise to us as business sentiment would have improved following the state elections on 12 Aug 23, with the unity government maintaining control of the state governments in its three states, i.e. Selangor, Penang and Negeri Sembilan.
This would have reduced the risk of a change in federal government and enhanced the political stability in Malaysia, in our view. It was even more encouraging if we track mom loan growth — banks’ total loans expanded by 0.7% mom in Aug 23, compared to an average increase of 0.2% mom in the preceding seven months (from Jan 23 to Jul 23). … partly reflected in stronger leading loan indicators.
The positive trend for loans was reaffirmed by the solid 11-13% mom growth in loan applications and approvals in Aug 23. The industry’s loan applications even hit an all-time high of RM139.1bn in Aug 23.
Based on this, CGSCIMB expects the industry’s loan growth to be at least sustained at the rate of 4.2% yoy (for end-Aug 23) for the remaining four months of 2023F, with upward bias, to achieve their projected loan growth of 4-5% for 2023F.
GIL ratio in a comfortable position to meet their end-2023F forecast
The industry’s gross impaired loan (GIL) ratio inched up by 2bp mom to 1.78% at end-Aug 23 based on the GIL ratio would have peaked at 1.8% at end-May 23.
Even if this is breached, CGSCIMB does not expect the ratio to surpass their forecast of 2% for end-Dec 23F, considering the subsiding credit risks from Covid-19 (after the withdrawal of the repayment assistance since 3Q21).
YTD, the GIL ratio only increased by 6bp in 8M23, and CGSCIMB does not foresee any events or factors that would cause a jump in GIL ratio in the remaining four months of 2023F.
CGSCIMB reaffirms Overweight on banks
The firm reiterates and Overweight call on Malaysian banks, predicated on potential partial write-backs 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 loan growth. Their top pick for the sector is RHB Bank, premised on its attractive valuation (CY24F P/E of 6.9x vs. sector’s 9.4x) and dividend yield (of 6.8% for CY23F).
Maybank Investment Bank (Maybank IB) remains Positive (unchanged) on the sector as the FSR fundamentals remain strong.
Maybank IB cited today that the FSR highlights a still-resilient household sector, and while headwinds persist across several business sectors, business credit quality generally remains sound.
Banks’ fundamentals remain strong with comfortable provision levels (115.8% loan loss coverage including regulatory reserves end-June 2023).
A POSITIVE calls was maintained on the banking sector, with BUYs on PBK, CIMB, HLBK, HLFG and ABMB.
Headwinds but a still resilient business sector
Challenges persist for businesses amid high input costs and weak external demand. BNM highlights the ongoing vulnerability of the SME segment, particularly those in the wholesale/retail (high overheads and intense competition), construction (elevated material and labour costs as well as tighter credit terms from suppliers) as well as the agriculture sector (lower production, labour shortages and higher input costs).
Positively though, business credit quality remains sound and the overall business loan impairment ratio was unchanged at 2.8% of business loans or 1% of total banking system loans.
Impaired SME loans rose to 3% of total SME loans from 2.9% end-Dec 2022, but account for just 0.5% of total system loans.
Stable HH debt-to-GDP ratio
Household (HH) debt expanded 5.1% YoY end-June 2023 versus 5.5% in 2H22, and the HH debt-to-GDP ratio was relatively unchanged at 81.9% against 81% in Dec 2022.
Households continued to hold financial assets in excess of debt, with the aggregate value of financial assets to total household debt stable at 2.1x. The HH loan impairment ratio was slightly higher at 1.3% versus 1.2% end-Dec 2022, driven by households whose incomes have yet to fully recover after the pandemic, but BNM is of the view that there is limited evidence of new pockets of vulnerabilities.
Easing housing oversupply conditions
The housing oversupply condition has continued to ease, with the number of unsold housing units declining to 141,855 from a peak of 183,918 in 4Q21.
This compares against a 2015-2019 average of 130,210. House prices expanded 4.8% YoY in 1Q23 against 3.9% in 4Q22.
Housing affordability remains an issue, with the median house price relative to median income continuing to fall within the ‘seriously unaffordable’ range at 4.3x as at end-2022 (2020: 4.7x).
