Positive outlook for banking on loan growth

PETALING JAYA: Market analysts remain mixed on the outlook of the local banking sector.

Kenanga Research, which maintained an “overweight” call on the industry, said in the near-term pressure on net interest margins (NIM) is expected to be more subdued, with loan growth to remain positive and asset quality to remain manageable.

On the whole, the research house noted the results season for the first quarter of 2024 (1Q24) ended positively, with seven results out of 10 coming in within expectations in addition to three banks reporting better-than-expected numbers.

“Market-wide, although most banks are guiding conservatively on a possible easing in loan growth numbers, their 1Q24 results have been encouraging, with a handful being able to report above industry numbers (6%),” Kenanga Research said in a report yesterday.

The research house said the reviewed collective agreements for employees, which took place in 2Q23, have led to banks reporting higher personnel costs as it is compared against a lower base.

However, the research firm stated it is likely that operational expenses could stabilise from here, notwithstanding investments in infrastructure and capabilities.

“With regard to asset quality, there has been no changes to credit-cost guidance as most banks believe troubled accounts have been well-provided for and are looking at reallocating past overlays injected during the pandemic,” it said.

Going forward, Kenanga Research said the outlook for the sector in 2024 has more caution than optimism.

It noted that most banks have seen previous NIM pressure to be subsiding as the market is rationalising their cost of funds, but on the flipside, greater prudence is ascribed against potential US Federal Reserve rate cuts in addition to the introduction of targeted fuel subsidies and prolonged weakness in the ringgit, which could spur inflation.

“This led the banks to anticipate a slower second half in 2024 and potential softening of investment markets.

“However, this could be counterbalanced by greater funding needs by infrastructure projects and the rejuvenation of exporters that benefit from a weak ringgit.

“On the other hand, asset quality concerns are likely to remain subdued given expectations for reporting to remain flattish, as certain banks with balance overlays are likely to opt to reallocate their buffers to non-pandemic related accounts,” the research house said.

Kenanga Research’s top picks are CIMB Group Holdings Bhd, RHB Bank Bhd and Alliance Bank Malaysia Bhd with a target price (TP) of RM7.60, RM7.25 and RM4.60, respectively.

Meanwhile, Hong Leong Investment Bank Research (HLIB Research) said the risk-reward for the sector is more balanced, as there are no new positive catalysts to spur share prices significantly higher.

The research house is projecting that financial year 2024 (FY24) and FY25 sector profits to grow at a slower rate of 6% and 4%, respectively, versus 15% in FY23.

This also lags the broader market with the FBM KLCI forecast to rise 7% in FY24.

“This is no thanks to NIMs being unable to recover meaningfully, non-interest income growth slowing, and no net credit cost write-backs. Regardless, valuations are not excessive and, hence, we feel it is too premature to turn full-on bearish,” HLIB Research said.

HLIB Research is “neutral” on the sector with “buy” calls on Public Bank Bhd with a target price of RM4.90, AMMB Holdings Bhd at RM4.60 and Alliance at RM4.10.