DESPITE Covid-19-related challenges, Malaysian banks have seen a rise in profitability year-to-date, mainly due to lower provisions and better net interest margins from last year.

Last year, banks were hit by increased provisions from the impact of the loan moratorium as well as low interest rates. As such, the stock prices of most banks were beaten down.

With the lower-than-expected provisions this year and better asset quality management, the share prices of larger banks have been relatively resilient over the past 12 months.

However, there has been some recent weakness in banking stock prices, and this came about largely in tandem with the overall market’s reaction to Budget 2022’s announcement that entailed the planned imposition of the Cukai Makmur or the prosperity tax, coupled with the rise in stamp duties for stock trading.

Year-to-date, Malayan Banking Bhd (Maybank) – the largest company on the stock exchange in terms of market capitalisation – is up around 4%. Similarly, Public Bank Bhd’s share price is up 2.64% year-to-date, while RHB Bank Bhd’s share price is up 3.2%.

It would appear that investors see large banks as a preferred avenue for safe investments this year.

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According to analysts, the share price of banks could see an upside next year with the expected better earnings from the improvement in the loan growth momentum spurred by the pick-up in business and consumer activities.

For next year, TA Securities Research projects a 5.2% increase in loan growth, fuelled by a 4.6% and 5.6% year-on-year growth in corporate and consumer loans, respectively.

“As evidenced by the recent rebound, we anticipate that business activity would continue to recover as businesses improve on the back of our forecast that real gross domestic growth (GDP) would grow at a stronger pace of 5% to 6% in 2022 versus an estimate of 3.9% in 2021.

“In our view, the favourable outlook is premised on the continued recovery in domestic activities, mainly in consumer spending and investment, and a resilient external sector,” it says in its latest research note. According to Bank Negara, total loans and advances grew 3.3% year-on-year in October 2021, rising from 2.9% year-on-year in September.

TA Securities Research is keeping an “overweight” call on the banking sector with the system remaining resilient, supported by healthy liquidity and capital buffers to absorb potential losses and support lending activities.

Other key factors supporting its recommendation on the sector are the continued repayment and debt rehabilitation assistance for targeted borrowers via the Credit Counselling and Debt Management Agency (AKPK) and a conducive interest rate environment, which should help keep systemic asset quality in check.

Rakuten Vincent LauRakuten Vincent Lau

Likewise, UOB Kay Hian Research is also optimistic on the banking sector next year, as it anticipates the sector to post an earnings growth of 3.5% despite the hefty increase in a one-off corporate tax.

“Banks’ earnings will continue to register a recovery well into 2023 on the back of a downward normalisation in provisions and the potential positive net interest margin surprise from overnight policy rate (OPR) hikes from 2022 to 2023,” explains the research house.

Similarly, Kenanga Research analyst Clement Chua sees a potential upside for banking stocks, but cautions on uncertainties of the OPR, digital banking competition and possible worsening of the Covid-19 pandemic.

“Fundamentally, there should be stronger earnings recovery from the banks, as impairments should ease in line with the reinvigorated economy, paired with a return of demand for loans to drive businesses.

“However, this may be hampered by interest pressures if Bank Negara decides to raise the OPR from the low of 1.75%, which has translated to better net interest margins for the banks over the last few quarters,” he says.

While there is optimism that the country’s economy will pick up, Chua says there is still no telling how new Covid-19 variants could shake up the economy in the near term.

“Additionally, there is uncertainty on how competitive digital banks would be in the chase for customer deposits,” he points out.

Bank Negara aims to issue up to five digital bank licences by the first quarter of next year.

However, it is the smaller banks that have seen downward pressure on their share price year-to-date.

Shares of Affin Bank Bhd declined 8% to RM1.66 on Dec 16, while Bank Islam Malaysia Bhd’s share price fell almost 9% to RM2.89.

Nonetheless, fund manager Danny Wong is betting on smaller banks for next year, as they have a more attractive price-to-book value, with some only trading at 0.5 times to 0.6 times.

Areca Capital Danny WongAreca Capital Danny Wong

“This is very attractive and these banks may be a target for merger and acquisition exercises next year.

“Smaller banks’ earnings are expected to be much better due to the low base effect and as they are more sensitive to earnings growth,” says Wong, who is the chief executive officer of Areca Capital.

Going into 2022, Rakuten Trade Sdn Bhd head of equity sales Vincent Lau reckons that the share price of banks is unlikely to see a downside, as the market has already factored in the uncertainties.

“Share prices of banks can only get better from here,” he says.

Lau believes that there should be a recovery in asset quality next year should there be no further lockdown measures and loan moratoriums.

“Banks are likely to have set aside certain pre-emptive provisions to cover any deterioration in asset quality,” says Lau.



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