Wow! You could be laughing yourself to the banks with higher interest rates!
1.75% to 2.75%. That’s how much Malaysia’s central bank, Bank Negara Malaysia (BNM) raised its interest rate in 2022.
Two years of low-interest rates finally came to an end in May 2022, when BNM started hiking its interest rate in line with most central banks in the world.
The hot bull run before 2022 came to an end with these decisions as local inflation in Malaysia also rose to 3.3% in 2022 from 2.5% in 2021.
However, one sector in Malaysia stood to gain from these higher interest rates – the banking sector.
Banks could now charge higher interest rates on the loans that they lend out. In particular, these 4 Malaysian banks could see their profitability improve in the future…
#1 Maybank
Maybank (MB) is Malaysia’s biggest financial services company in terms of market capitalization, operating mainly in Malaysia, Singapore, and Indonesia.
Maybankis mainly involved in consumer and business banking with that segment comprising about 58.4% of total net interest income. This is followed by its corporate banking and global markets division at 34.5%.
The higher interest rates since May 2022, has definitely boosted Maybank’s financial performance. Revenue grew by 13.5% and 16.7% in second quarter of 2022 (2Q 2022) and 3Q 2022 respectively. Meanwhile, profits also grew by 8.2% in the two quarters combined.
As Maybank is a favourite among investors, it currently has a HOLD call from most analysts as investors have already priced in the higher interest rates boost to their operations.
However, some upside can still be found in Maybank with the average target price at RM9.19, implying about 5.5% upside from its current share price.
There are a couple of factors that you can consider when investing in Maybank:
- Dominant position of Maybank in the Malaysian banking sector -> Biggest bank in Malaysia.
- Ability to withstand recessions as it didn’t make any losses during the pandemic.
- High profit margins at about 20.0% and dividend yields of 6.7%.
For the year 2022, Maybank’s share price have risen by 4.8% to RM8.70, already breaching December 2019’s share price of RM8.64.
Maybankis trading at a price-to-earnings ratio of 13.0 times, much higher than the industrial average of 8.5 times. This indicates that investors are expecting Maybank to outperform its peers in the coming year.
#2 Public Bank
Deemed one of the most efficient bank in Malaysia, Public Bank (PB) is currently the second biggest bank in Malaysia after MB. It operates mainly in Malaysia but also has businesses in Hong Kong, China, Cambodia, Vietnam, Laos and Sri Lanka.
Public Bankmainly operates in the retail (consumer and business) banking segment, comprising of 46.1% of its revenue, followed by hire purchase (12.8%), and corporate lending (7.6%).
Public Bank’s 3Q 2022 have been particularly fruitful, with revenue and profits growing by 13.1% and 16.2% respectively. Remember the point on most efficient bank? Public Bank’s profit margin stood at a whopping 31.0%.
Hence, Public Bank currently has an OVERPERFORM investment call with a target price of RM4.82. This implies an upside of 14.5%.
Public Bank might be worth taking a look at for the following factors:
- Very high profit margins of about 30%.
- Recession-proof, as PB did not make any losses during the pandemic.
- Steady dividend yield of 3.0% to 4.5%.
In 2022, Public Bank’s share price rose by 3.8%to RM4.32, higher than December 2019’s price level of RM3.89. Currently, Public Bank is trading at a price-to-earnings ratio of 14.2 times, the highest in the banking sector.
#3 Hong Leong Bank
Hong Leong Bank (HLB) is part of the banking arm of Hong Leong Group, and has operations in Malaysia, Singapore, Hong Kong, Vietnam, Cambodia, and China.
HLB’s biggest business is personal financial services (consumer), comprising about 52.1% of total revenue. This is followed by global markets (22.2%) and business & corporate banking (19.8%).
In line with the other Malaysian banks, HLB’s financial performance was boosted by the higher interest rates. Revenue grew by 8.7% and 12.8% in 2Q 2022 and 3Q 2022 respectively, while profits rose by 31.6% and 14.3% over the same period.
Currently, HLB has an OUTPERFORM investment call with a target price of RM23.24. This implies an upside of about 13.5%.
There are a couple of factors that could make holding HLB worthwhile:
- Part of the larger Hong Leong Group which has other businesses that could leverage on HLB’s financing capabilities.
- Exceptionally high profit margins of around 45.0%.
HLB rose by 10.4% to RM20.56 in 2022, breaching the level of RM17.30 before the pandemic. It is trading at a price-to-earnings ratio of 12.5 times which is higher than the sector average of 8.5 times.
#4 CIMB Bank
CIMB Bank (CIMB) is headquartered in Malaysia but has operations in a wide variety of countries which includes Singapore, Indonesia, Hong Kong, Thailand, China, U.K., U.S., Myanmar, Vietnam, Bahrain and Cambodia.
CIMB enjoyed a relatively strong performance also in 3Q 2022, with revenue growing by 16.8% while it rebounded to a profit of RM1.4 billion from a loss of RM75.2 million.
At the current juncture, most analysts have CIMB at an OVERWEIGHT investment call and a target price of 12.8%. This implies an upside of about 12.8%.
CIMB could be worth taking a look at for the following reasons:
- High profit margins of about 20%.
- Exposure to higher risk and potentially revenue-generating countries such as Myanmar, Vietnam and Cambodia.
- High dividend yield between 3.0% to 7.8%.
For the year 2022, CIMB’s share price rose by 6.4% while it is currently trading at a price-to-earnings ratio of 12.3 times.
Conclusion
As the Federal Reserve nears the end of the interest rate hikes by the second half of 2023, it could mean the same thing for Malaysia’s central bank too.
Most economists are expecting another 25 basis points hike in the Overnight Policy Rate by BNM, and Malaysian banks share price could still have some gas left in the tank.
Malaysian banks do look enticing for their high dividend yields but investors do need to remember to do your homework beforehand.
