Compelling valuations and potential write-backs in management overlay in Malaysian Banks render the sector an Overweight call.
CGSCIMB, today (Sept 5), reaffirms their Overweight call on banks based on predicated on potential re-rating catalysts of potential write-backs in management overlay and their expected resumption of net interest income growth in CY24F.
Sector valuations are also attractive at 9.8x CY24F P/E while the dividend yield looks compelling to us at 4.8% in CY23F.
CGSCIMB’s sector top pick is RHB Bank due to its attractive valuation and dividend yield as well as a potential increase in dividend payout.
Potential downside risks to our sector rating are a deterioration in loan growth and asset quality.
Industry loan growth continued to head south
The banking industry’s loan growth moderated further from 4.4% yoy at end-Jun 23 to 4.2% yoy at end-Jul 23. The drag came mainly from business loans, which saw growth screech to a halt (+0.2% yoy at end-Jul 23 vs. +0.7% yoy at end-Jun 23).
CGSCIMB thinks that this reflected the weak business sentiment as most businesses adopted a wait-and-see stance for their investment/expansion plans ahead of the state elections in six states on 12 Aug 23.
Meanwhile, household loan momentum inched up from 5.1% yoy at end-Jun 23 to 5.2% yoy at end-Jul 23. and they are
Not overly concerned about the moderation in loan growth
CGSCIMB is not overly concerned about the weakening loan growth as (1) they do not expect loan growth in 2023F to be far below our projected 4-5%, and (2) every 1% pt cut in our loan growth projection will only reduce our CY23F net profit (NP) forecasts by circa 0.8%, based on our estimates.
GIL ratio could be stabilising
In CGSCIMB’s report dated 1 Aug 23, they stated that the industry’s gross impaired loan (GIL) ratio likely peaked at 1.8% at end-May 23 following an uptrend in 5M23.
Indeed, the GIL ratio was sustained at 1.76% at end-Jul 23, on par with the level at end-Jun 23.
Looking at the YTD trend, the firm sees minimal risk of the industry’s GIL ratio breaching their projected rate of 2% at end-Dec 23.
Although the industry’s loan loss coverage (LLC) fell in 7M23 from the level of 98% at end-Dec 22 to 91.5% at end-Jul 23, CGSCIMB regards the current level of LLC as comfortable (as it is not far off from full coverage of 100%).
Strong momentum sustained for housing and auto loans
Among household loans, the momentum for residential mortgages (housing loans) and auto loans remained strong, inching up to 6.9% yoy and 8.9% yoy, respectively, at end-Jul 23.
They see these two segments as the key supports for the growth of not only household loans but also total loans in the banking industry. Conversely, the momentum for credit card receivables moderated from 14.3% yoy at end-Jun 23 to 13% yoy at end-Jul 23.
Loan applications declined yoy in Jul 23
The banking industry’s loan applications declined by 6.3% yoy in Jul 23 following a contraction of 8.9% yoy in Jun 23.
This was primarily dragged down by the 19.1% yoy fall in applications for working capital loans.
Meanwhile, applications for residential mortgages decreased by 1.6% yoy in Jul 23, narrower than the 18.8% yoy decline in Jun 23.
On a positive note, applications for auto loans rose by 4.9% yoy in Jul 23, reversing the 5.9% yoy contraction in Jun 23.
