PETALING JAYA: After a generally encouraging first quarter 2022 (1Q22) results, the challenges in the banking sector may weigh on earnings for the year before they gain momentum next year.
Among the downside risks are inflationary pressure, global instability amid the Russia-Ukraine war, defaults in corporate debt and a higher-than-expected default rate on repayment assistance loans.
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Maybank Investment Bank (Maybank IB) is projecting a 2% operating profit growth for this year and 6% in 2023.
“We project cumulative operating profit to be flat (2%) in 2022. While loan growth is expected to be moderately faster, we expect net interest margins (NIMs) to be stable, with potential upside should rates be raised, moderated in part by slower current account savings account (CASA) growth and fixed deposit competition,” it added.
The research house expected lower non-interest income (NOII) on the back of possible investment losses and lower investment gains for the year.
Maybank IB anticipated faster expansion in operating expense, with the recovery in economic activity and higher digital spend, especially with the new digital banking licences having been awarded.
Cumulative operating profit is projected to expand 6% in 2023 predominantly on moderately improved interest margins and the resumption in NOII growth, it noted.
On the back of the 6% expansion in operating profit and lower credit costs, it expected cumulative core net profit to rebound 18% year-on-year (y-o-y) in 2023.
For banks’ under its coverage, Maybank IB has forecast total loan (including overseas loans) to grow by 4.9% for this year, in line with the domestic industry loan growth forecast of 4.9%.
The FY22 loan growth assumptions are at the lower end of guidance for most banks, according to the research house.
Maybank IB, which is maintaining a “positive” stance on the banking sector said: “The downside risks that could affect the sector are weaker-than-expected gross domestic product (GDP) growth, which could lead to slower loan growth and asset- quality issues, marked-to-market investment losses if bond yields rise, a slowdown in CASA growth, which could exacerbate deposit competition.”
RHB Research is positive on NIMs given the earlier-than-expected 25 basis points (bps) hike in the overnight policy rate (OPR) and expectations of a further 25 bps increase in the second half of the year.
RHB Research is positive on NIMs given the earlier-than-expected 25 basis points (bps) hike in the overnight policy rate (OPR) and expectations of a further 25 bps increase in the second half of the year.
“Already, there are signs of a pick-up in deposit competition as some banks are undertaking fixed deposit campaigns to lock in longer tenure deposits ahead of further hikes in the OPR. This would also see a moderation in CASA growth.
“Our sensitivity analysis points to a 2% uplift to sector earnings from a 25 bps OPR hike over a 12-month period.
RHB Research, which is maintaining an “overweight” call on the sector, believed that asset quality would hold up, given the sustained fall in loans under relief assistance and borrowers being able to absorb the expected rise in interest rates.
Stable asset quality and moderate loan growth should keep capital ratios at solid levels.
Notwithstanding the one-off Cukai Makmur or prosperity tax, the research house expected banks to sustain FY21 dividend payout ratios in FY22.
However, continued volatility in financial markets will see lingering risks to non-interest income, namely income from investment securities and capital market activities, according to the research house.
In 1Q22, core fee income fell 7.3% quarter-on-quarter.