Not underwhelmed by 1Q22 profit hiccup
? Following 4 quarters of double-digit growth, banks’ 1Q22 CNP fell 0.2% yoy.
We expect CNP growth to resume in 2Q22F at between +3 and +9% yoy.
? We are projecting CNP growth of 4% for banks in 2022F, underpinned by a
15.2% drop in LLP and a 7.8% rise in net interest income.
? Reiterate Overweight on banks, given the expected expansion in NIM (in
tandem with the OPR upcycle) and an improvement in LLP.
The 4-quarter streak of strong CNP growth was broken in 1Q22…
Malaysian banks recorded impressive double-digit yoy growth of 25-45% in core net profit
(CNP) for four consecutive quarters (from 1Q21 to 4Q21), but the trend was broken in 1Q22
with the sector’s CNP inching down by 0.2% yoy. The earnings drag in 1Q22, which was
largely expected, was due to the: 1) additional taxation from Cukai Makmur (CM), and 2) a
20.2% yoy slump in non-interest income, dented by adverse investment income. The
positive take in 1Q22 was the 62.1% yoy plunge in loan loss provisioning (LLP).
…but two positive developments are on the cards for 2Q22F
We envisage a brighter earnings outlook for banks in 2Q22F, given two positive
developments: 1) the beginning of an upcycle in the overnight policy rate (OPR), with the
25bp hike on 11 May 22, which would lift banks’ net interest margins (NIM), and 2) two
banks, i.e. AMMB and Alliance Bank, ceasing to incur CM taxation in 2Q22F. With this, we
expect banks’ CNP growth to resume to between +3% and +9% yoy in 2Q22F.
Expecting a continuous trend of yearly earnings recovery in 2022F
Notwithstanding the stalled earnings growth in 1Q22, the continuous yearly earnings
recovery would be intact with our projected CNP growth of 4% in 2022F. The earnings
catalysts in 2022F would be: 1) a 15.2% drop in LLP, and 2) healthy 7.8% growth in net
interest income, lifted by OPR hikes. On the flip side, we estimate that the CM taxation
would lower banks’ CY22 CNP by c.7%. Excluding CM taxation, banks’ CNP growth would
be higher at an estimated 11% in 2022F.
Risks from higher inflation and interest-rate hikes
The credit risks from Covid-19 have been subsiding since the re-opening of the economy,
but there could be new risks emerging from the heightened inflation and interest-rate hikes,
which could have negative impact on banks’ loan growth and asset quality. However, we
do not expect these to alter our forecasts, as we are: 1) projecting a downtrend in loan
growth from 5% yoy at end-Apr 22 to 4-5% in 2022, and 2) forecasting a rise in the
industry’s gross impaired loan ratio from 1.5% at end-Dec 21 to 1.8-2.0% at end-Dec 22.
Reiterate Overweight on Malaysian banks
We continue to rate banks Overweight, predicated on the earnings recovery trend in 2021-
23F. Potential re-rating catalysts would be: 1) an expansion in banks’ NIM, in line with the
OPR upcycle, and 2) a decline in LLP. Our picks for the sector are RHBB, HLB and PBB.