Malaysia Sector Outlook 2022: Keep an eye out for the Financial Sector amid hawkish environment

The buying interest within the financial sector surged YTD despite the negative sentiment on the broad market. KLFIN (Bursa Malaysia Finance) Index has been the best performing sector so far in Bursa Malaysia bolstered by the rising bond yields, market expectation on interest rate hikes and economic reopening alongside the high vaccination coverage.



The combination of lower growth forecast, rising inflation and hawkish monetary policy signals have hit the equity market, modestly at the index level and more significantly in the highly valued technology sector. FBMKLCI market sentiment was broadly negative in earlier-2022 with a -2.37% of decline to close at 1,512 points as of 31st of January. However, the buying interest within the financial sector surged YTD despite the negative sentiment on the broad market. KLFIN (Bursa Malaysia Finance) Index has been the best performing sector so far in Bursa Malaysia bolstered by the rising bond yields, market expectation on interest rate hikes and economic reopening alongside the high vaccination coverage.


Given that the banking industry holds a significant weightage in the finance index, we look to focus more on this industry in this article. Since our bullish call in the previous article last year, it has done pretty well with approximately 10% return. Coming next, we continue to have bullish view on Malaysia Financial Sector due to some of the key catalysts below.


Top 10 components in Bursa Malaysia Finance Index
















Source: Bloomberg Finance L.P., iFAST compilations. Data as of 10th Feb 2022.


Robust Loan Growth Recovery alongside Economy Reopening

As lockdown measures in Malaysia were removed and the economy started to recover in year-end 2021, loan growth surged 4.8% YoY in December 2021 (from 4.3% in November). The momentum was underpinned by the pent-up demand from both household and business segments which posted 4.3% YoY (Nov: 4.1%) and 5.0% YoY (Nov: 4.8%) respectively during the lockdown period in Q2 and Q3 2021.


We regard the significant increase loan applications in the industry driven by the swift expansion of loan application for residential mortgages, auto loans and working capital loans as an encouraging sign as this reflected the economic normalization in the aftermath of the reopening of economics and easing of movement control order. Similarly, the industry’s loan approvals also accelerated 8.6% MoM at RM42.8 billion, higher than pre-Covid level.


Increasing Banking Loan Applied

Increasing Banking Loan Approved


Overnight Policy Rate (OPR)

Bank Negara Malaysia’s (BNM) maintains an accommodative monetary stance through remaining Malaysia’s Overnight Policy Rate (OPR) flat at 1.75%, a historically low level noting the risks to the growth outlook remain skewed to the downside. Slower-than-expected global growth, worsening supply chain disruptions and the uncertainty on reimposition of containment measures are the main reasons for the BNM’s cautious stance.


Looking ahead, we expect OPR to start the rate hikes this year given the economic normalization and higher inflation rate. Historically, financial sector tends to have a positive relationship with OPR (as shown below). With that, banks benefits from the OPR hikes as the increase in OPR expands bank’s NIM (Net Interest Margin) with operating in a high-yield environment and higher profit from floating-rate loans.



Latest Dividend yield for Top 10 components in Bursa Malaysia Finance Index

Source: Bloomberg Finance L.P., iFAST compilations. Data as of 10th Feb 2022.


Takeaway

During the pandemic’s peak in 2020, investors abandoned local banks in favour of the brighter tech and healthcare sector. After two difficult years of dealing with the Covid-19 pandemic, Malaysian banks are expected to perform better this year as a result of a rebounding economy, a potential rate hike and fewer provisions. In our point of view, we like the financial sector because financial institutions are the best proxy of economic recovery and a significant benefactor of rising interest rates.


In our opinion, we like banks as the valuation remain attractive with ample room for upside potential on the back of strong economic rebound and solid earnings growth outlook. Based on the valuation, the KL Financial Index is now trading at 0.98x P/B based on 2024F estimated earnings, below the fair P/B of 1.4x, which translated into a 22% huge upside growth potential alongside sustainable 5% dividend yield.


The downside risk is our overweight call on the Malaysian Financial Sector including but not limited to: 1) Weaker-than-expected economic growth in 2022F as this might result in higher-than-expected loan loss provisioning and softer loan growth. 2) The negative impact of the 3-month interest waiver for B50 borrowers might be recorded as high provision losses in Q4 2021F or H1 2022F.


Consensus Earnings for Financial Sector

Source: Bloomberg Finance L.P., iFAST compilations. Data as of 10th Feb 2022.


Source: iFast Capital









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