Banking sector’s 6M23 earnings increase by seven pct y-o-y
The banking sector’s earnings in the first six months of 2023 (6M23) has increased by seven per cent year on year (y-o-y), mainly due to higher non-interest income (NOII) and lower provisions.
In a sector report, industry analysts at AmInvestment Bank Bhd (AmInvestment Bank) shared that the NOII of banks had improved by 18.7 per cent y-o-y during the period under review and was driven by Maybank’s stronger treasury and market income which were led by investment, trading income and unrealised marked-to-market gains from securities.
“Also, CIMB’s NOII rose due to stronger treasury, markets, FX income and gains from the sale of impaired loans in Indonesia and Thailand,” it said.
These gains in NOII however, were offset by weaker net interest income (NII) from compression in Net Interest Margins (NIM) and higher overhead expenses.
During the first quarter of 2023 (1Q23), the underlying NIMs of banking had seen compression by 30 bps on average but saw some easing in 2Q23 where NIM saw average compression of 5bps.
AmInvestment Bank reckoned that pressure on NIM might continue to ease and with the gradual expiry of expensive FDs from earlier deposit campaigns, they expect an improvement to the bank’s NIM in 2H23.
Operating expenditure (opex) also took a hit as the bank’s opex during 6M23 climbed by 6.3 per cent y-o-y due to an increase in personal cost from the collective agreement adjustments and higher IT expenses.
Overall, AmInvestment Bank guided that the 6M23 earnings of Maybank, Public Bank, RHB, Hong Leong Bank, CIMB, Alliance Bank and Bank Islam were all within its net profit estimates.
It also maintained its ‘overweight’ rating on the banking sector as it believed that banks are continuing to trade at an undemanding average valuation of 0.9-fold FY24F price book valuation (PBV) while offering an attractive dividend yield of 5.7 per cent.
It also pointed out that the sector’s fundamentals have remained steady and that player have remained prudent on provisions and will continue to hold substantial provision buffers to mitigate credit risk until improvements are seen in the macroeconomic outlook.
“Stronger NOII coming from investment, trading income & FX gains are expected to cushion weaker NII from compression in NIM. Liquidity and capital position of banks remained robust. Banks’ LCR and NSFR stayed well above the regulatory requirement of 100 per cent.
“Asset quality of the banking system continues to be stable with a GIL ratio of 1.8 per cent based on BNM statistics as at end-July 2023,” it said.
All in, the research arm asserted that they are projecting an improvement in net credit cost for the banking sector to 27bps in 2023 compared to 33bps in 2022.
While optimistic on the local banking sector, AmInvestment Bank shared that some downside risks to its upbeat forecasts include potential prolonged rate hikes in the US that will impact their NOII estimates, and sticky inflation rates in developed countries and global economic slowdown that may lead to stagflation.
“Stagflation will result in a higher unemployment rate and this, coupled with a higher inflation rate, could pose a downside risk to the asset quality ratio of banks, resulting in a likely need to increase provisions for potential credit losses,” it concluded.