PETALING JAYA: Lenders should benefit from the increase in net interest margins (NIM) over the next few quarters following the two hikes in the overnight rate (OPR) in July and this month.
On top of that, banks should also see stronger non-interest income growth on the back of improving investment income given stabilizing bond yields, a research house said.
In its Client Banking Report, CGS-CIMB Research said these reasons help underpin the expected core net profit growth of 5% to 6% year-over-year (year-on-year) for banks in the third quarter of this year.
“We saw two bright spots for banking revenue in the second quarter (2Q22), an acceleration in net interest income (NII) growth from 5.6% yoy in 1Q22 to 7.1% year-on-year in 2Q22, driven by RPO increases and stronger loan growth as well as a recovery in non-interest revenue growth from a 20.2% YoY contraction in 1Q22 to a 2.3% YoY expansion in 2Q22,” he said.
The research house said this helped banks post 1.9% year-on-year net profit growth in 2Q22 compared to a 0.2% year-on-year decline in 1Q22, despite the negative impact of Cukai Makmur (Prosperity Tax) which increased the effective tax rate for banks from 22.8% in 2Q21 to 28.7% in 2Q22.
Listed local banks’ total core net profit came in at RM7 billion, slightly below CGS-CIMB Research’s expectation of RM7.1 billion to RM7.5 billion in 2Q22, mainly due to a stronger than expected year-over-year decline in non-interest income. for some banks and a larger than expected quarterly increase in loan loss provisioning (LLP).
Banks’ LLPs are expected to rise in 3Q22 from 1Q22 and 2Q22 levels due to an expected continued upward trend in gross impaired loan ratio, and also, there were LLP takeovers by a few banks in 1T22 and at 2T22 which are not sustainable in 3Q22, the research house said.
But even with a higher LLP in 3Q22, CGS-CIMB Research said it believes its projected 25% decline in LLP in 2022 would be achievable, as LLP fell 49.6% year-on-year in the first half. of this year.
He added that only Malayan Banking Bhd recorded an increase in 2Q22 LLP, which jumped 59.6% year-on-year, supported by additional provisions for old impaired loans.
All other banks recorded large double-digit declines in their 2Q22 LLPs, with year-on-year declines ranging from 56.6% for Affin Bank Bhd to 84.5% for Hong Leong Bank Bhd. Alliance Bank Malaysia Bhd even recorded a net write-back of RM17.3m in LLP in 2Q22.
“We expect core net profit growth of 3.1% for Malaysian banks this year, supported by an 8.6% increase in net interest income and a 25% decline in LLP,” CGS said. -CIMB Research.
The above would be partially offset by higher tax burdens from banks due to Cukai Makmur.
“We estimate that Cukai Makmur’s taxation would reduce banks’ core net profit growth in 2022 by approximately 8%.
“We reaffirm our ‘overweight’ rating on banks, given potential catalysts for repricing of net interest margin expansion amid the bull RPO cycle, robust loan growth from 5% to 6% in 2022 and a drop in 2022 LLP”, It said.
He added that his top picks for the sector were RHB Bank Bhd, Hong Leong Bank Bhd and Public Bank Bhd..