PETALING JAYA: The Malaysian banking sector is on track to see continuous earnings growth in 2022, underpinned by lower quarterly loan loss provisioning (LLP) and a potential interest rate hike later this year.
CGS-CIMB Research in a report said there was a RM1.36bil decline in total provisions for the banking industry in the first quarter of 2022, compared with an increase of RM254.6mil in the fourth quarter of 2021 and RM1.58bil in the first quarter of 2021.
“Based on this, we believe that banks’ (LLP) declined significantly year-on-year and quarter-on-quarter in the first quarter of 2022, compared to the levels of RM1.7bil in the fourth quarter of 2021 and RM2.75bil in the first quarter of 2021, unless there was a spike in LLP for overseas loans.
“This could help to offset earnings drags from the potential contraction in banks’ first quarter 2022 net interest margins and higher quarterly tax expense from Cukai Makmur. This also supports our projection for a 16% decline in banks’ LLP in 2022.”
Additionally, CGS-CIMB Research said the domestic banking industry’s loan growth moderated from 4.7% year-on-year in February 2022 to 4.6% year-on-year in March 2022.
“There was a divergence in the growth trends of major loan segments as growth in household loans improved from 4.7% year-on-year at end-February 2022 to 4.9% year-on-year at end-March 2022, while that for business loans eased from 5.5% and 4.5% year-on-year by end February and March 2022, respectively.
“Overall, loan growth in March 2022 was in line with our projection of 4% to 5% for 2022.”
CGS-CIMB Research said it is retaining its overweight rating on Malaysian banks, on the back of a projected earnings growth recovery in 2022 and 2023.
“The key potential downside risks to our overweight call on Malaysian banks include weaker-than-expected economic growth in 2022, as this could cause banks to register higher-than-expected LLP and softer loan growth.
“Economic expansion could be dragged by elevated prices of oil and raw materials, partly arising from geopolitical tensions.”
CGS-CIMB Research noted that banks have started to unwind repayment assistance offered to their borrowers amidst the reopening of the economy.
“The potential risk from this is a spike in banks’ gross impaired loans, mainly from borrowers whose financial positions have been severely impaired by the Covid-19 outbreak.
“Should the industry’s gross impaired loan ratio increase significantly above our projected 1.8% to 2% by end-December 2022, banks would have to increase their loan loss provisioning in 2022.”
Additionally, the research house said it has factored in a 25 basis points hike in the overnight policy rate (OPR) in mid-2022 in its earnings forecasts for all Malaysian banks.
“This lifted our net profit forecasts for the banking sector by an estimated 1.2% for 2022 and 2.4% for 2023.
“As such, there could be downside risks to our earnings forecasts if the assumed 25 basis points hike in OPR does not materialise in 2022.”
Meanwhile, UOB Kay Hian Research, which also has an overweight call in a sector report on Singapore banks, said it expects brighter prospects for Asean countries this year.
“Asean countries benefit from easing of safe distancing measures and resumption of air travel.
“In particular, Malaysia and Indonesia gain from recovery in domestic consumption and higher energy and commodity prices.”
Additionally, the research house said Asean countries benefit from the ongoing disruption to the global supply chain.
“Many multinational companies have adopted the China plus one strategy (a business strategy to avoid investing only in China and diversify business into other countries) and have plans to set up alternative production facilities within the region,” it said.