Improved earnings prospects for banks

KUALA LUMPUR: Earnings prospects for the banking sector in Malaysia are expected to improve in 2024, in tandem with the anticipated rebound in the domestic economy.

According to TA Research, the sector’s earnings growth this year will be anchored by three themes – more robust domestic spending, rising green investments and a return of foreign interests.

The brokerage forecast a 7.3% earnings growth for banks this year.

“We anticipate improved earnings prospects in 2024, driven by a rebound in domestic activities, support from green investments and a more stable political environment,” TA Research wrote in a report yesterday.

“This positive outlook may also attract renewed foreign interest,” it added, citing the sector’s stable earnings growth, compelling valuations and attractive dividend yields.

Nevertheless, TA Research maintained its “neutral” stance on the sector. Its top sector picks are Hong Leong Bank Bhd and CIMB Group Holding Bhd.

It pointed out that banks remained cautious about asset quality, rising overhead expenses, potentially softer contributions from overseas operations and ongoing geopolitical tension.

On a positive note, TA Research said the government’s efforts to stimulate investment activities and potential investments in renewable energy under the National Energy Transition Roadmap could help boost domestic activities and attract foreign investments.

“Private investment is forecast to rebound significantly at 6.9% (2023: 3.2%). As such, we anticipate business loans to gain momentum in 2024, reaching around 3.4% (from 2% in 2023).

“Consumer loans continued to demonstrate remarkable resilience throughout 2023. The outlook for consumer loans remains robust, supported by the impending implementation of the progressive wage policy in June 2024,” it added.

As for consumer loans, TA Research projected a growth of 6.4% in 2024, based on the expected 6.6% surge in private consumption.

Overall, loan growth could come in at 5.1%, up from around 4.7% in 2023, according to the brokerage.

Post-third-quarter 2023 results season, TA Research tweaked its 2023 and 2024 earnings estimates by 0.03% and 0.25%, respectively, by raising the net credit cost assumption and lowering the growth assumption for Islamic Banking operations for Alliance Bank Malaysia Bhd, lowering the loan loss charge assumption for CIMB, and reducing the net interest margin assumptions for RHB Bank Bhd and Affin Bank Bhd.

With that, the brokerage forecast the sector’s earnings to grow by 12.4% in 2023 to RM32.6bil and 7.3% in 2024 to RM35bil.

Valuation-wise, TA Research noted, the sector appeared to be trading at an appealing 2024 price-to-book value of 0.95 times, with a consistent industry return on equity (ROE) of approximately 10.2% and an average dividend yield of roughly 5.2%.

In 2025, the sector’s average ROE could widen marginally to roughly 10.3%, it added.