PETALING JAYA: The banking sector is expected to post robust net profit growth in the final quarter of 2023. This is supported by the absence of prosperity tax, resilient loans growth, and benevolent treasury market conditions, Hong Leong Investment Bank (HLIB) Research says.
However, the brokerage argued that the outlook for the first half of 2024 would likely be muted due to continued net interest margin (NIM) compression, the tapering growth of non-interest income (NOII) and lack of non-cash charge (NCC) write-backs.
Overall, HLIB Research expected the sector’s earnings growth to slow to 5% in 2024 against 14% in 2023. The sector’s return-to-equity ratio was also seen narrowing 10 basis points (bps) to 9.3%, it said.
HLIB Research retained its “neutral” stance on banking.
In its report, HLIB Research yesterday said: “We believe a meaningful NIM recovery in 2024 would be difficult, considering fixed deposit to current-account-savings-account substitution may further normalise down closer to pre-pandemic levels, the standardised base rate adoption for new retail floating-rate loans may prevent banks from passing higher funding costs to borrowers, and the environmental, social and governance push to originate more green financing could erode lending yields.”
Also, it noted the Kuala Lumpur interbank offered rate was still seen climbing, putting some pressure on NIM, it said. It projected a mild NIM compression of one to two bps for 2024 to 2025 for the sector.
“All considered, we opine the banking sector has a balanced risk-reward profile as there are no new positive catalysts to spur prices significantly higher and we believe banks are poised for a pedestrian outing in the first half of 2024,” HLIB Research explained.
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Besides, the market might have overlooked and under discounted some of the pain points, such as difficulty in NIM recovery, decelerating NOII growth and the potential lack of NCC write-backs.
Regardless, valuations were undemanding and we still expect banks to eke out minor profit growth in 2024 and 2025, HLIB Research said. Moreover, the sector dividend yield of around 5% was “not too bad”, it added.HLIB Research noted it was sceptical that the 2023 robust NOII growth tempo of 10% could be sustained given historical volatility of treasury gains.
In addition, there were no signs of Bank Negara cutting the overnight policy rate in the near term and thus, the Malaysian Government Securities market would likely remain lacklustre.
HLIB Research expected NOII growth to taper to 3% in 2024 to 2025, and NCC to inch down by only one to two bps in 2024 to 2025, coming off slightly from an elevated base.
“So far, the banking sector’s gross impaired loan (GIL) ratio stayed fairly stable post Covid-19 pandemic but it was to a large extent by design through writing off bad loans, non-performing loan sale, and reclassifications,” HLIB Research noted.
“However, this playbook has limitation and GIL ratio is bound to climb. Hence, the prospects of Covid-19 pre-emptive provision write-backs is not great as most banks are looking to retain them (via reallocation) to battle potential asset quality weakness in the short term,” it added.