2022 banking outlook
Looking beyond Cukai Makmur
While we expect aggregate net profit growth to be flat (+2%) in 2022, i) Cukai Makmur is one-off and we expect earnings to rebound 18% in 2023, ii) there is positive upside if credit costs are lower than our elevated assumptions, and iii) dividend yields are decent. POSITIVE maintained on the sector, with BUYs on HLBK, AMMB, ABMB, HLFG, BIMB and RHB.
2022 earnings expected to be flat…
Unlike the hefty NIM expansion (+21bps) which supported operating profit growth of 6% in 2021, we expect NIMs to flatten/slightly contract in 2022 amid slower CASA growth and increased deposit competition. Having conservatively factored in lower non-interest income (from further marked-to-market investment losses as bond yields rise), and slightly faster expense growth, we expect the sector’s operating profit growth to be muted (+2%) in 2022. We expect higher tax under Cukai Makmur to offset lower credit costs and project a slight 1% contraction in cumulative core net profit. Positively though, dividend payout ratios are normalizing with upside surprises if they return to pre-COVID levels (Fig 55).
…but look to 2023 for 18% net profit rebound
Investors should look to 2023, where we project an 18% net profit rebound on lower provisions and the absence of Cukai Makmur. Excluding the impact of Cukai Makmur, we expect cumulative core net profit to expand 7% in 2022E and 8% in 2023E. There is room for upside surprises should interest rates rise further (we impute only one rate hike in 4Q22) and/or credit costs (which we have kept elevated) fall much faster. We expect ROAE to bounce back to 10.2% in 2023 (from 9.1% in 2022; 9.6% in 2021).
Reduced asset quality risk
Loans under Repayment Assistance (RA) for our banks have since dropped 54% from MYR440b to MYR202b or from 25% of total loans in Oct/Nov 2021 to 14% in Jan/Feb 2022. Banks in our coverage have set aside about MYR11.4b worth of management overlays since 1Q20 against RA loans. Hypothetically assuming a default rate of 20% and a loss given default (LGD) rate of 30%, current provision levels appear sufficient, with loan loss coverage ranging from 89% to 237% (Fig 45). On grounds of prudence, we have kept our credit cost assumptions elevated at 43/38bps in 2022/23E, against a pre-COVID average of 28bps from FY17-FY19 (Fig 48).