Bank Negara Malaysia’s (BNM) banking sector statistics for June 2023 showed healthy growth in loans at 4.4% YoY, but lending indicators are softer with a YoY decline in loan applications and approvals, partly due to the high base effect from last year.
RHB’s Malaysia Sector Update cited today ( Aug 1) the call on the sector was premised on the banks’ healthy earnings and dividend growth, and a potential NIM recovery in 2H23.
System loans rose 4.4% YoY (MoM: +0.2%) in June 2023, mainly driven by mortgages (+7% YoY, +1% MoM), hire purchase (+9% YoY, + 1% MoM), and working capital (+2% YoY, -1% MoM).
Both household (+5% YoY, +1% MoM) and non-household (+3% YoY, flat MoM) continued to grow steadily. Loans in the finance (+12% YoY, -1% MoM) and retail (+4% YoY, +1% MoM) sectors more than offset the YoY decline in loans from manufacturing (-4% YoY, +1% MoM) and utilities (-5% YoY, -1% MoM).
Softer loan leading indicators MoM but YTD still healthy
The average lending rate has ticked upwards by 5bps MoM to 5.44% (YTD: +43 bps), slightly slower than the 13bps MoM increase in May 2023 following the increase in overnight policy rate (OPR) that month.
While system loan applications declined by 9% YoY (high base in Jun 2022), on a 3-monthmoving average (3MMA), loan applications remained steady with a 0.7% growth YoY (-5.4% MoM). Loan approvals on a 3MMA basis fell slightly by 0.6% YoY (-4.9% MoM), and loan disbursements stayed flat YoY (-1.5% MoM).
On a YTD basis, loan approvals were up 9% vs 1H22, which RHB believes will be supportive of loan growth ahead.
RHB added system deposits grew 6% YoY (flat MoM), outpacing loans growth during the same period, driven by a 10% YoY increase in fixed deposits (FD) (flat MoM). CASA fell by 4% YoY, but grew 1% MoM.
This led to a slight increase in the system CASA ratio MoM to 30.7% (May 2023: 30.3%, Jun 2022: 33.3%). This remained above the pre-pandemic average of 25-27%.
Asset quality still sound
System GILs dropped 2% MoM (+1% YoY), led by lower GIL relating to working capital (-4% MoM, +5% YoY) and personal use (-4% MoM, flat YoY), offsetting the increases in residential properties (+1% MoM, +12% YoY) and credit cards (+5% MoM, +38% YoY).
As compared to Mar 2023, system GIL ticked up 1% QoQ – which suggests asset quality was stable QoQ. System LLC was 91.8% (May 2023: 93.2%, June 2022: 98.6%) and as compared to 1Q23: 95.9%.
The banking system remained liquid and well-capitalised in Jun 2023 – LDR, liquidity coverage ratio, and CET-1 stood at 85.5%, 155% and 14.4%. SME loans grew 2% YoY in May 2023 (1% MoM), with most of the growth delivered by the retail (+9% YoY, +1% MoM) and transport & communication sectors (+9% YoY, flat MoM), while SME GIL ratio stood at 2.93% (Apr 2023: 2.91%, May 2022: 2.86%).
RHB maintains an OVERWEIGHT call with top picks: Malayan Banking, Hong Leong Bank, and CIMB. Overall, the investment bank reiterates thei 2023 system loans growth forecast of c.5% YoY.
Kenanga Investment Bank (Kenanga) concurs with the call on the basis of June 2023 system loans grew by 4.4% YoY, within their 4.0%−4.5% target in anticipation of modest economic activities in 2HCY23.
This could also be reflected in moderating applications reported. Gross impaired loans (GIL) are stabilising at 1.76% following some pressures in early months, probably due to festive-driven missed payments.
Deposits continued to grow with CASA ratios showing hints of a return, possibly signalling the softening of fixed deposit competition. Kenanga does not anticipate further OPR hikes in CY23 which may disrupt product margin optimisation analysis for the banks.
Sector-wide weakness may lead to investors seeking more tactical opportunities than fundamental ones, proven right by recent share price performances.
Moderating growth
In June 2023, system loans grew by 4.4% YoY, in line with our CY23 expectations of 4.0%−4.5%.
Households (+5.3%) led with credit card transactions showing the largest expansion (+14%). Meanwhile, business loans (+3.0%) saw the biggest uptick from the financial services segment (+12%) with manufacturing accounts notably declining (- 4.0%) likely as supply chain conditions improve.
On a MoM basis, household loans picked up (+0.5%) but business loans fell short (-0.2%) as inflows were likely planned to only contain festive spending (refer to Tables 1−3 for breakdown of system loans).
Applications soften (-9% YoY, -11% MoM), as expected, perhaps owing to the pent-up applications during the prior months on heightened seasonal factors. The decline could also be attributed to May 2023’s unexpected 25 bps OPR hike which called for further repricing of banking rates.
This may have triggered prospective borrowers to be more selective with their applications whilst seeking more competitive offerings (refer to Tables 4−5 for breakdown of system loan applications).
GIL showing some ease
In June 2023, the Gross Incurred Losses (GIL) came in at 1.76% (May 2023: 1.80%, Jun 2022: 1.81%).
Kenanga had anticipated the prior month’s readings to be slightly toppish due to conscious missed payments in favour of prioritised festive spending. Nonetheless, this remained within their comfortable “normal levels” of 1.6%−1.8% on a system basis.
Meanwhile, industry loan loss coverage is reporting progressive exhaustion at 91.8% (May 2023: 93.2%, Jun 2022: 98.6%) as certain banks may be weighing down on their provisions. On the flipside, industry CET-1 ratio is stable at 14.4% (May 2023: 14.6%, Jun 2022: 14.7%)
CASA share returns
System deposits are also showing moderating growth with a flattish MoM reporting (+5.9% YoY), within their CY23 deposits growth target of 5.0%−5.5%. CASA ratio is showing its first notable MoM gain in Jun 2023 at 28.2% (May 2023: 27.8%, Jun 2022: 30.7%) in the last 14 months as industry rates are likely normalising from 2022’s interest rate upcycles.
While this may translate to more favourable funding costs to the banks, they may in turn seek to narrow lending rates to gain market share instead.
A weaker perception could be led by discouraging local currency performance as well as generally less bullish production numbers painting their domestic landscape to be less attractive. Still, Kenaga continues to have confidence in the banking space for its resilient earnings and with average dividend yield of 6% providing an attractive shelter for longer-term investors amidst softening interest for the space.
For this 3QCY23 season, Kenanga believes investors may seek more tactical opportunities given the ongoing sector-wide weakness. Th investment bank highlights CIMB as they believe investors may pay closer attention towards its write-back prospects closer to the end of the year, and CIMB’s sizeable overlay relative to earnings presents some handsome translation to earnings and special dividends.
On the other hand, the group is also expected to report double-digit earnings growth in the coming years, where some peers could only see more modest performance.
Kenana also likes PBBANK as the large outflux of foreign investors from the stock may be unwarranted, seemingly only justified by a weakening MYR undermining foreign portfolio holdings.
The group also appears arrested by uncertainties in its future shareholding structure, but Kenanga believes any clarity from here only offers upside prospects as overall operations are expected to be fundamentally intact given its systematic importance to the local financial ecosystem, being the safest bank in terms of asset quality readings, present levels offer cheap opportunities for entry.
Lastly, Kenanga also favour AMBANK as we believe its current fundamentals are highly supportive of healthier discussions for M&As, which have in the past been frequently considered. The group is also one of the leaders in terms of SME profile, which is touted as a high-growth segment that could accelerate the group’s market share growth.
Kenanga recommends names such as: (i) CIMB (OP; TP: RM6.00) for its highest potential writeback gains amongst large-cap banks, (ii) PBBANK (OP; TP: RM4.40) for possible resurgence of interest from clarity in its shareholdings, and (iii) AMBANK (OP; TP: RM4.80) as we revisit its consolidation prospects.
