The banking sector has demonstrated solid performance in the second quarter of 2024 (2QCY24), with all ten stock coverages meeting expectations, except for MBSB, which fell short of consensus due to lower-than-anticipated impairment projections.

MIDF Research (MIDF) in a note today (Sept 4) said that most banks are shifting towards more profitable corporate-centric disbursements, reflecting a 6.4% year-on-year increase.

However, AMBANK, BIMB, and CIMB reported loan growth rates below the industry average at around 4%, as they prioritise selective asset yields.

As investors adjust their expectations for medium- to long-term bank fundamentals, MIDF noted that the potential for further re-rating appears limited. Banks' fundamental performances for FY25 have been largely factored into earnings models.

A review of the cost of equity (COE) revealed that some banks, such as AFFIN and BIMB, are experiencing lower volatility in share price movements compared to previous years.

After analysing the banks' five-year Beta, MIDF said the majority average was found to be close to 0.9x. As a result, MIDF have lowered the applied Beta for most sector stocks by 5-20 basis points to align with their respective five-year averages. CIMB's Beta remains at 1.10x, while MBSB's is set at 0.80x as it undergoes a foundational rediscovery following its merger with MIDF. PBBANK maintains a Beta of 0.90x, reflecting its pre-COVID levels despite increased volatility.

Target prices for the banks have improved between 4% and 22%, with ABMB re-rated to OUTPERFORM after previously being de-rated.

The domestic market share for the ten listed local banks stands at 82.2%, up 21 basis points quarter-on-quarter. MAYBANK leads the market with an 18.4% share, bolstered by significant inflows into its mortgage books. In contrast, CIMB and AMBANK have lost market share due to their focus on optimising profitability.

Looking ahead, banks have generally maintained their corporate guidance, with MAYBANK and RHBBANK slightly increasing their loan targets due to better year-to-date gains.

The outlook for funding costs remains stable, as the Bank Negara Malaysia (BNM) is expected to keep the Overnight Policy Rate at 3.00% throughout 2024 and 2025.

The banking sector remains attractive due to favorable economic conditions. However, there are concerns about excessive lending to meet market demand, which could expose banks to increased risks.

MIDF recommended a cautious approach, with top picks being PBBANK and HLBANK, both leaders in gross impaired loans (GIL) supported by collateralized loans, particularly mortgages. RHBBANK is also favored for its dividend yields of approximately 7%, offering a buffer against potential capital downside while presenting opportunities for improved earnings in the latter half of FY24.