KUALA LUMPUR: It has been a better-than-expected reporting season for the banking sector in the third quarter (Q3) of 2021 where four out of eight banks under Hong Leong Investment Bank Bhd (HLIB) beat profit estimates.
HLIB said Affin Bank Bhd, Alliance Bank Malaysia Bhd, CIMB Group Holdings Bhd had seen lower-than-expected loan loss provision while RHB Bank Bhd booked in stronger-than-expected total income.
Another four banks - AMMB Holdings Bhd, Bank Islam Malaysia Bhd (BIMB), Malayan Banking Bhd (Maybank) and Public Bank Bhd - came in line with the firm's estimates.
HLIB said while Q3 sector earnings declined six per cent on the back of negative jaws ratio, ex-Maybank, the lower provision for bad loans (-17 per cent) helped to cushion the overall impact.
"We note the profit increase for Affin, Alliance and AMMB was mainly due to this reason while RHB experienced stronger total income growth," it said.
HLIB said despite the slight negative jaws ratio generated from quicker operating expenditure growth (up 1.0 per cent) versus total income (flattish), sector bottom-line rose 25 per cent, thanks to lower allowance for bad loans (-31 per cent).
At the top, the broadening in net interest margin (NIM) (up 15 basis points) and loans growth (up 4.0 per cent) were erased by poor non-interest income (NOII) (-23 per cent).
"Outliers with profit drop were BIMB, Maybank and Public Bank because of weaker top-line performance, which resulted in larger negative jaws," it added.
HLIB expects domestic banks' NIM to come under slight pressure due to deposit rivalry (typical year end affair) and limited scope for further current account savings account (CASA) expansion.
"Also, lending growth is anticipated to chug along given economic reopening," it said.
HLIB said separately, gross impaired loan (GIL) ratio was likely to creep upwards but it was not overly worried as banks had made heavy pre-emptive provisioning in financial year 2020 (FY20).
"In our view, credit risk has been adequately priced in by the market, looking at the high net credit cost (NCC) assumption applied for FY21 by both us and consensus (above the normalised run-rate but below FY20's level).
"Furthermore, we believe the government and Bank Negara Malaysia will stay supportive in helping troubled borrowers, limiting a significant deterioration in GIL ratio," it added.
HLIB has retained its "Overweight" outlook on the sector.
"The sector's risk-reward profile continues to skew favourably to the upside as most negatives have been considered by the market.
'In our opinion, Covid-19 woes will likely fizzle out in 2022 while the state of the economy and banking sector will only get better in time.
'Furthermore, valuations are undemanding and there is ample market liquidity," it said.