PETALING JAYA: Earnings for the banking sector in the first quarter of 2024 (1Q24) have come in broadly in line with analysts’ expectations.
However, slower expansion in non-interest income is likely to drag on the sector’s earnings for the rest of 2024.
“In 2024, sector earnings growth is anticipated to decrease to 7%, down from 15% in 2023, primarily due to a slower expansion in non-interest income.
“However, a more stable net interest margin (NIM) outlook and a rebound in loan growth, projected at 5.5%-6% (compared with 5.3% in 2023), are expected to support overall growth,” UOB Kay Hian (UOBKH) Research said in a report.The research firm said it anticipates a moderation in non-interest income growth to 6% this year, compared with 25% in 2023, primarily due to a more subdued performance in treasury-related income.
“The 10-year Malaysian Government Securities (MGS) yield has stabilised at the pre-pandemic level of 3.9%, with expectations of Bank Negara maintaining the overnight policy rate at the current level of 3%, akin to pre-pandemic levels.
“Thus we foresee limited opportunities for banks to further benefit from a decline in MGS yields.”
The research house said, in 1Q24, six out of the nine banks under its coverage reported earnings that were in line with expectations. Two were above, while one came in below expectations.
It noted that the KL Finance index has slightly underperformed the FBM KLCI, rising 9.1% compared with the FBM KLCI’s 9.3% increase.
Sentiment among banks has been mixed because of the lack of strong fundamental catalysts. However, in light of the possible peaking of the interest rate cycle and moderating inflationary outlook in the United States, interest in emerging markets, including Malaysia, is likely to gain momentum, the research house said.
“In this respect, we feel that CIMB Group Holdings Bhd will continue to be a key beneficiary of this theme, which has played out well year-to-date.”
CIMB Group is the research firm’s top sector pick.
According to UOBKH Research, the banking sector has maintained a relatively stable gross impaired loan ratio of 1.62% versus the pre-Covid-19 average of 1.55%, largely achieved through more aggressive bad debt write-offs and recovery measures.
The research house has also factored in minimal write-backs as banks may take a wait-and-see approach on the potential impact of targeted subsidies and higher consumption tax.
“Our 2024 sector net credit cost assumption of 22 basis points (bps) is only marginally below the pre-Covid-19 average of 25bps, like 2023’s 23bps.
“This suggests that we have not accounted for a significant reversal in excess provisions even through 2024, because we prefer a cautious approach as the rollout of various targeted subsidies and consumption tax could impact asset quality in 2024 and even the first half of 2025.
“If any reversals occur, we believe Public Bank Bhd has the most potential for writebacks, given its robust loans loss coverage,” the research firm added.
Overall, the research house said net credit cost is expected to remain below the pre-pandemic level and be relatively stable. This expectation is based on the fact that banks have already allocated sufficient pre-emptive provisions, said UOBKH Research.