RHB Research has retained its rating on Malaysian Banking Sector Update, a resounding “OVERWEIGHT” call. Meanwhile, Top Picks of the local banking sector are: Hong Leong Bank (HL Bank), AMMB and Malayan Banking (Maybank). Despite the 25bps interest rate hike in May, system loans recorded the highest monthly growth rate seen YTD, +0.7% MoM in June (YoY: +5.6%). This is in line with the guidance the research house had received from the banks, which suggested that business momentum remains sustained despite inflationary concerns and the rising interest rate environment. YTD-June, system loans growth is tracking the research house’s full-year forecast well, which the analysts keep at +5.1% YoY.
System loans grew 5.6% YoY (MoM: +0.7%), bringing 2022 annualised YTD growth to 5.3% YoY, which is in line with our 5.1% growth forecast for the year. As expected, loans to the wholesale & retail trade sector continued to show strong momentum, gaining 13.5% YoY (MoM: +1.9%) on the back of sustained business momentum post-economic reopening. Elsewhere, loans for residential mortgages (+7.3% YoY, +0.6% MoM) and working capital (+7.4% YoY, 1.4% MoM) also demonstrated strong increases.
Strong loan applications despite rate hikes. June loan applications were up 18% MoM (YoY: +42%) in spite of the 11bps MoM hike in the average lending rate to 3.79%. Auto loan applications surged 16% MoM, likely driven by the expiry of the SST exemption, and borrowers attempting to lock in a lower interest rate in anticipation of further overnight policy rate (OPR) hikes. Overall, lending indicators were healthy, with YTD-June system loan applications, approvals and disbursements up 11.2%, 24.9% and 19.4%.
Asset quality remains robust, despite gross impaired loans (GILs) adding 7.4% YoY (MoM: +1.2%). In particular, increases in GILs from households (+9.2% YoY, +1.8% MoM) and the wholesale & retail trade sector (+19.8% YoY, -0.6% MoM). However, this was expected, given the expiry of certain loan relief programmes. As a whole, system GIL ratio of 1.65% remains at a manageable level, considering LLC of 108.5% is still relatively high compared to the pre-pandemic range of 80-90%.
Staying cautious of risky construction loans. Applications for construction-related loans almost tripled MoM in June, but approvals for such loans declined 4% MoM. Guidance from banks indicates that lenders are becoming more prudent on loans for construction purposes, as increasing building material costs and a shortage of labour are challenges confronting industry players. Construction-related GILs have increased 19% YTD-June, and had the highest GIL ratio at 6.36% (Dec 21: 5.21%),
vs the overall business GIL ratio of 2.38% (Dec 21: 2.05%).
Deposits grew 8% YoY (MoM: +0.8%), with CASA deposits adding 8.8% YoY (MoM: +0.7%). Fixed deposits grew at a slower 3% YoY (MoM: +0.7%), likely due to depositors preferring to keep liquidity in hand during inflationary periods. At end-June, system LDR stood at 86.7% (Jun 21: 88.9%, May 22:86.8%).
Top Picks – Target Price
Hong Leong Bank (HLBK MK) – BUY MYR23.70
AMMB (AMM MK) – BUY MYR4.40
Malayan Banking (MAY MK) – BUY MYR10.40