KUALA LUMPUR: A potential spike in bad loans is unlikely to hurt the asset quality of the banking system.
Year-on-year (YoY) the banking sector posted weak total income of -2 per cent and higher allowances for loan loss, up 11 per cent, offset by lower effective tax rate, leading to a mere sector earnings improvement of only 1 per cent.
Hong Leong Investment Bank (HLIB) Research, in its earnings wrap up for the banking sector said, it is not particularly worried on asset quality since banks are better equipped than prior slumps, with large loan loss allowances built up over the past three years acting as robust buffers to cushion any potential spike in GIL ratio.
GIL ratio improved 10 basis points sequentially to 1.64 per cent.
"We expect net interest margin (NIM) to be stable in Q1 2024 as fixed deposits start to exit a seasonally more competitive quarter. Moreover, lending growth is seen to chug along for now," it said.
The firm said five out of eight banks under its coverage posted earnings that were in line with expectations namely Alliance Bank Malaysia Bhd, CIMB Bank, Malayan Banking Bhd, Public Bank Bhd and RHB Bank Bhd.
Bank Islam Malaysia Bhd's performance came above expectations while Affin Bank Bhd and AmBank Group came below expectations.
"However, AmBank saw a steep profit drop (-66 per cent) given that it made large pre-emptive provision for its retail franchise." Outlier with significant profit rise was Affin (doubled), thanks to a sharp decline in bad loan allowances.
"Both loan and deposit growth gained tempo to 7.4 per cent YoY and 7.6 per cent YoY respectively.
Based on these two categories, it noted that the top three quickest growing banks were Affin, Alliance, and Maybank.
"In our view, the risk-reward now is more balanced as there are no new positive catalysts to spur share prices significantly higher. "Also, we are projecting FY24/25 sector profit to grow at a slower rate of 6 per cent/4 per cent vs 15 per cent in FY23, which lags the broader market as well. " This is no thanks to NIM unable to recover meaningfully, non-interest income growth to slow, and no net credit costs write-backs. "Regardless, valuations are not excessive and hence, we feel it is too premature to turn full-on bearish," it said.
The firm maintained "Neutral" on the sector with a "Buy" call for Public Bank at a target price of RM4.80. For mid-size banks it favours AmBank (TP: RM4.20) for its dividend payout bandwidth in the near future and within the small banks category it likes Alliance (TP: RM3.95) given its inexpensive valuations.