PETALING JAYA: Banks in Malaysia remain supported by strong capital buffers and improved earnings outlook, allowing them to handle any potential slippages in asset quality over the coming quarters.
Analysts are bullish on the banking sector, following the release of Bank Negara’s Financial Stability Report on March 30.
In the report, Bank Negara said its stress tests confirm that banks’ capital buffers are sufficient to absorb an increase in credit losses from the business sector, particularly major, publicly-traded enterprises, under unfavourable stress scenarios.
MIDF Research said in a statement that banks are expected to weather through a deterioration in asset quality in the coming quarters with adequate loan loss coverage and capital ratios.
“Despite headwinds, we still favour the banking sector mainly for reduced credit costs in 2022, improved structural performance and potential pre-emptive provisioning writebacks in 2023,” it said.
The research house added that the banking sector maintains its high liquidity with “superb liquidity coverage ratio and net stable funding ratio”.
Referring to Bank Negara’s updated stress tests, Hong Leong Investment Bank (HLIB) Research noted that banks’ cumulative credit losses for 2022 to 2024 could come up to RM41.7bil. However, the sector’s Common Equity Tier 1 ratio is still expected to stay comfortably above the regulatory minimum requirement at 14.5%.
“We believe the sector’s risk-reward profile is skewed to the upside as valuations are undemanding and we are only at the cusp of an overnight policy rate hike upcycle with economic recovery, which benefits banks.
“As such, we remain bullish and employ a rather broad stock buying strategy in the first half of 2022,” according to the research house.
Meanwhile, CGS-CIMB Research pointed out that banks’ strong capital buffers would protect the sector from a spike in gross impaired loans (GIL).
Under the stress tests conducted by Bank Negara, CGS-CIMB Research said banks’ GIL ratio could balloon from 1.4% in Dec 2021 to about 3% in Dec 2022, about 4.5% in Dec 2023 and 6.1% to 6.6% in Dec 2024.
In these scenarios, banks’ total capital ratio could drop from 18.9% in Dec 2021 to a low of about 17.8% in Dec 2024, which would still be significantly higher than the regulatory minimum requirement of 8%.
“This showed that Malaysian banks have a strong capital buffer against any shocks from a spike in GIL ratio,” the brokerage said.
TA Research, which is also overweight on the sector, projected a net profit growth of 7.2% and 19.6% in 2022 and 2023 for the banking sector.
“We believe that with the central bank proactively monitoring developments closely and ensuring sufficient liquidity in the system, financial institutions intensifying collection efforts, identifying vulnerable borrowers and extending repayment assistance to those in need, and conducive interest rate environment, should help keep systemic asset quality risk in check,” it said in a note.