In Mar 2023, system loans grew by 5.0% year-on-year, lifted by both household and business accounts, said Kenanga Research (Kenanga) in the recent Sector Update Report.
“We deem this to still be within our expectation of 4.0%-4.5% for calendar year 2023 because while market conditions are expected to still be favourable in the near term, it may soften as inflationary pressures become more prevalent in the latter half of the year,” said Kenanga.
For the time being, Kenanga anticipates household demand for loans to be mostly held by more primary market property purchases as commitments into secondary market transactions become costlier to cash flow.
Meanwhile, wholesale and retail businesses appear to lead in demand for working capital with some pick-up seen in financial services as well.
On a month-on-month basis, both segments were likely aided by an increase in funds required ahead of Hari Raya festivities. Kenanga sees a sustained in flow of both household and business loans, likely spurred by the upcoming Hari Raya seasonality in Apr 2023. Key contributors continued to be residential properties with transport vehicles also picking up perhaps in line with new model releases.
“We note that construction activities saw a significant rise as contractors may be planning to roll out projects post-Hari Raya festivities. Meanwhile, loan approvals also increased in tandem with the growth in applications,” said Kenanga.
Mar 2023 gross impaired loan was stable at 1.75%. Kenanga gathered that this is in spite of the fact that banks may be slightly less restrictive with credit screening concerns as Covid-19 risks dissipate.
Industry loan loss coverage continued to linger below 100% at 95.8% from the gradual consumption of provisions, although Kenanga noted that listed institutions are maintaining reserves above this level.
On the flipside, industry common equity tier-1 ratios were relatively stable at 14.8%. Deposits saw its first month-on-month decline by 0.1% in five months although this still registered as a lofty 7.0% year-on-year growth.
“Similar to our loan growth expectations, we anticipate moderation in the latter half of the year to meet our 5.0%-5.5% calendar year 2023 deposit growth target,” said Kenanga.
Current account savings account (CASA) ratio also saw a sequential rise to 29.2% as depositors were likely prioritising liquidity during the festive season. Kenanga expects CASA levels to erode further in the medium term as termed deposit rates are growing more attractive.
Recent readings paint a more upbeat outlook with loans and deposits picking up steadily while supported by manageable risk levels. However, Kenanga believes subsequent periods may not see similar strengths with expectations that higher inflation and uncertain macro factors may suppress overall activities.
In spite of this, Kenanga continues to believe that banks will stay resilient as any shocks would be sufficiently buffered by their respectively high capital reserves as well as excess overlays and covid provisions which could either be consumed or written back if conditions are more favourable.
That said, Kenanga is cognizant of the depressed state of banking stocks amidst recent fall-outs of several high-profile foreign financial institutions.
“Hence we recommend selective names that offer greater safety nets amongst peers while avoiding banks with higher non-interest income exposure as investors may also view this space with greater caution,” said Kenanga.
