The banking sector remains the shining sector among the rest with loan growth recording an even higher figure than before, industry loan growth rose by +6.8%yoy, the strongest performance since pre-pandemic times. MIDF expects the trend to continue as borrowers continue locking in loans before the full normalisation of OPR
- Retail loans accelerate even further to +7.4%yoy. Residential mortgages were the core driver, with strong showings by unsecured loans. Note that hire purchase numbers could have easily been much higher, if not for the lack of vehicle supply acting as a bottleneck. Business loans skyrocket to +6.1%yoy. Working capital loans leaped to +9.4%yoy. Expect this trend to continue with the reopening of borders driving trade, as well as a less volatile bond environment offering incentives to corporates to drawdown.
- Both loan applications and approvals remain well above that of recent years. System approval rates hit a new high of 61%. SME loan rates have moderated past >55% in recent months (pre-pandemic range: 35-40%), as banks scramble for a stake in this attractive segment. MIDF sees rising competition in this space. Deposit rates grew at a stellar +7.5%yoy. This was largely driven by strong FD rates, as CASA contracted by -0.3%mom. Note that CASA is sticky, leading to minimal rundown despite rising OPR. GIL ratio and provisions flattish. System GIL ticked downwards by -1bps mom to 1.84%. Provisioning has only inched upwards slightly from that of the previous quarter – shaping up for banks to have healthy credit costs in the following quarter.
- Average lending yields saw a sizeable jump after OPR hike, while deposit rates have yet to fully adjust. Possible SRR hike in Jan-23? With sufficient liquidity to support banking activity now, we expect BNM to raise SRR by +50bps in Jan-23. This comes as SRR flexibility to be put into government bonds will end by Dec-22.
Going forward, core earning drivers remain strong loan growth and leading indicators, an environment still rich with liquidity to support the said loan growth, lower credit costs, and OPR hike-related benefits to net interest margins. Additionally, the banking sector is often synonymous with high dividend yields, with several names offering yields above >4%. This should offset headwinds: namely asset quality concerns, normalization of operating expenses, heightened deposit competition, and still-weak non-interest income sources.
Top picks for the sector are Maybank (BUY, TP: 10.41) and CIMB (BUY, TP: 6.16).
