by DayakDaily Team
KUCHING, Jan 8: Malaysian-based banks should continue to offer investors a good defensive option to tide through the current external volatility, analysts observed.
According to a report by RHB Investment Bank Bhd’s research analysts (RHB IB), Malaysian banks performed well last year, thanks to a combination of decent earnings growth, attractive dividend yield coupled with a re-rating in valuations aided by foreign interest which could be due to the positive domestic macroeconomic outlook and reform agenda.
“That said, we think Malaysian banks should continue to offer investors a good defensive option to tide through the external volatility, given stable domestic macroeconomic conditions coupled with ample stock provision buffers available to be reversed and support earnings growth, if need be,” it added.
It explained that the bank sector earnings should prove defensive with Malaysian banks largely neutral to US Federal Funds Rate (FFR) cuts and foreign exchange movements.
In the past, the key drags to sector earnings growth have been net interest margins (NIM) and/or credit cost.
However, in 2024, it pointed out that banks managed their NIM well on better funding cost discipline and by allowing the loan-to-deposit ratio (LDR) to rise further.
Nevertheless, it cautioned that with loan pricing competition (such mortgage, SME, wholesale) staying stiff, coupled with tighter liquidity conditions (sector LDR is at multi-decade highs – 3Q24 sector LDR at 95.8 per cent while system LDR in November was 88 per cent), there might not be much room for banks to reprice deposit rates lower.
“On the flipside, with a number of banks still holding on to healthy management overlays and stable asset quality outlook, there could be continued management overlay reversals to help mitigate potential NIM pressure and support bottomline growth,” RHB IB assured.
Malaysian banks’ dividend yield also remains attractive as the sector offers FY25F dividend yield of over five per cent, RHB IB’s research team said.
“We think this is attractive and there could be room for yield to compress further – positive for share prices.
“Furthermore, there could be upside potential to dividend projections for banks as, with a stable outlook and better visibility on the impact from Basel III reforms, these could be positive for dividend payout and capital management initiatives,” it added.
Basel III reforms are expected to be implemented in stages in Malaysia with operational risk set to go live in 2025.
“The impact looks manageable with banks guiding for a small negative impact to CET-1 ratio. We expect further guidance on the impact from credit risk, especially from internal ratings-based (IRB) banks.
“Banks that are on the standardised approach should emerge largely unaffected with a slight potential positive impact to capital ratio, while IRB banks that have been more conservative in their approach should fare better vs other IRB peers,” RHB IB said.
Overall, RHB IB estimated that the sector will likely record a growth of seven per cent in profit after tax and minority interest (PATMI) in 2024 before stabilising to five to six per cent growth in 2025 and 2026. — DayakDaily
