Bank Negara Malaysia’s banking sector statistics for August remain steady with loan growth maintained at 4.2% year-on-year but lending indicators are softer with lower loan applications and approvals, partly due to a higher base last year.
System CASA ratio ticked up MoM as the 12-month fixed deposit (FD) rate declined from its peak in May.
RHB Research in its Sector Update today (Oct 2) said: “We maintain our call on the sector amid a backdrop of normalising earnings growth heading into 2024,”
RHB maintains their call on the sector amid a backdrop of normalising earnings growth heading into 2024.
System loans grew 4.2% YoY (+0.7% MoM) in August, as lending to households (+6% YoY, +1% MoM) and non-households (+2% YoY, +1% MoM) were sustained. This was supported by higher growth across most loan purposes such as transport vehicles (+9% YoY, +1% MoM), residential property (+9% YoY, +1% MoM), and personal use (+4% YoY, +1% MoM).
The sectors that recorded lower loans include utilities (-9% YoY, -1% MoM) and manufacturing (-1% YoY, +1% MoM). On a YTD basis, system loans grew 2.3% (annualised: +3.4%). We maintain our 2023 system loans growth forecast at 4-4.5%.
Stable lending indicators
On a 3-month moving average (3MMA) basis, lending indicators reported a slight decline YoY partly due to a higher base last year. System loan applications dropped 2% YoY (+3% MoM), and loan approvals fell 8% YoY (+1% MoM), mostly from lower approvals for the business segment (-14% YoY, +2% MoM) whereas loan approvals for households were flattish. Loan disbursements recorded YoY and MoM increases of 5% and 2%.
System deposits grew 4.6% YoY (+0.6% MoM), which outpaced loans growth during the same period. This continued to be driven by FD which grew 7% YoY, although it recorded a first MoM decline (-0.6%) since January. This is as the 12-month FD rate declined further to 2.86% after hitting a peak of 2.90% in May. CASA was 2% lower YoY, but ticked up +2% MoM. This led to a slightly higher CASA ratio of 30.8% (July: 30.4%, Aug 2022: 32.3%).
Healthy asset quality
System GILs rose slightly (+1% YoY, +2% MoM) as the increase in GILs sectors such as wholesale & retail (+32% YoY, +4% MoM), construction (+3% YoY, +2% MoM), and households (+14% YoY, flat MoM) offset the decrease in GILs in other sectors. Consequently, system GIL ratio ticked up to 1.78% in August (July: 1.76%, Aug 2022: 1.84%) and system LLC fell to 90.6% from 91.5% in July (Aug 2022: 97.3%).
Other highlights
The banking system remains healthy, with sufficient capital buffers – CET-1 stood at a 14.5%. Liquidity is ample with LDR at 86.1% and liquidity coverage ratio at a high 149%. For the SME segment, loans grew 7% YoY (flat MoM) from increases across all sectors barring mining & quarrying (-2% YoY, -1% MoM). The SME GIL ratio ticked up slightly to 3.09% in July (June: 3.03%, Jul 2022: 2.88%).
RHB issues a NEUTRAL calls with their Top Picks: CIMB ( TP: MYR6.88), Hong Leong Bank (TP: MYR23.20, and AMMB (TP: MYR4.20).
Meanwhile, Kenanga Investment Bank (Kenanga) said the Malaysian banking industry’s loans growth is said to be on track to end CY23 at 4.0%-4.5%, outpacing research houses GDP forecasts of 3.7%, as the shift to affordable housing could lend support to mortgage demand.
Kenana Investment Bank’s (Kenanga) Banking Sector Update released today (Oct 2) opines that OPR will stay at 3.00%, possibly throughout CY24 as well given that the rates in the US have more or less peaked.
“This should allow the banks to regain much lost ground in NIMs in CY24 post deposits competition. For 4QCY23, we look for names that could demonstrate persistent growth in dividend yield and ROE. Our large-cap pick is CIMB (OP; TP: RM6.30) given its strong earnings growth prospects backed by its regional footprint and largest overlay-to-earnings pool in the industry which may translate to payout surprises in CY24.
“Meanwhile, AMBANK’s (OP; TP: RM4.80) improving fundamentals could potentially bring consolidation talks back on the table for the group. In the small-cap space, ABMB (OP; TP: RM4.30) may once again be in focus given its fundamentals that are comparable to its large-cap peers,” Kenanaga said in the statement.
Ending the year stronger than it has started
The industry loans growth is on track to end CY23 at 4.0%-4.5%, outpacing Kenanga’s in-house GDP forecast of 3.7%. Broader industry-wide risk may remain with regards to softening loans performance but they anticipate loans to be supported by a resilient mortgage supply with a growing take-up of affordable housing. Meanwhile, NIMs are due for stabilisation with CY24 likely to see expansion from CY23’s just-recovering base. This will likely materialise on the back of our flattish OPR expectations towards CY24, supported by the rates in the US that have more or less peaked.
Provisions-wise, certain banks may continue to be stingy with write-backs to account for more prudent economic considerations, but Kenaga opines that the probability of lumpy write-backs would only spill over towards CY24.
To recap, the earlier half of CY23 was faced with deep concerns on risk of contagion led by the fallout of systemically important banks (i.e. Credit Suisse). Not helping the local scene was the continued stress on NIMs following excessive price competition on deposit rates as players sought to reprice ahead of OPR adjustments, which were thrown off-base following BNM’s decision to pause rate hikes temporarily until May 2023. As distress over these matters dilute, they reckon investors will turn more upbeat on the sector.
Maintain OVERWEIGHT on the banking sector
While Kenanga maintains their optimism on the sector on better overall forward macros, they believe investors may still be highly selective in their long-term picks. Plotting projections into a sector matrix, they had filtered their top picks to be banks which may remain underappreciated amidst their respective growth prospects in both dividends and ROEs. For large cap banks, Kenanga continues to feature:
(i) CIMB as they remain to be one of the best-poised players to demonstrate above-industry growth thanks to their enlarging regional footprint. On the other hand, CIMB’s sizeable overlay relative to earnings present some handsome translation to earnings and special dividends.
(ii) 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 market share growth for the group should we anticipate better economic prospects in the medium-term.
For smaller cap banks, we see potential in ABMB to be a favourite as it is fundamentally comparable to larger cap peers in both dividend and ROE. The group’s strength lies in its high proportion of quality SME accounts which also led the group to maintain one of the highest NIMs amongst its peers.
Sector still catching up
The sector has mostly improved following the drag in sentiment from March 2023’s global banking crisis and June 2023’s foreign outflows ahead of state elections in August 2023. From only MAYBANK (OP; TP: RM9.95) and MBSB (UP; TP: RM0.63) outperforming headline indices, Kenanga reverted to a more balanced state of five out of their ten banking stocks tracking above.
MBSB was the best performing stock (+19% YTD) thanks to the successful acquisition of MIDF at highly favourable valuations to the group. On the other hand, BIMB (MP; TP: RM2.15) remained as the biggest laggard following some possible concerns of sustained costs. In 4QCY23, Kenanga anticipates some further upside momentum as the rising prospects of write-backs may lead to some knee-jerk earnings delivery, boosting appetite for the sector.
Loans growth may outpace economic output
July 2023’s system loans growth came in a 4.2% which Kenanga’s anticipate will close within our CY23 target of 4.0%-4.5% (CY22: 5.7%). This is despite the softening of their in-house GDP expectations of 3.7% growth for the year.
Kenanga views that business loans would ease in accordance to the lower economic performance, but with cushioning from sustained household loans (namely for residential property). They gathered that prospective home owners remain as supportive participants in the market, but with a pivoting interest to newer affordable housing units which are now more sensible to cashflow.
Previously, it was noted that secondary market transactions led the mortgage market when OPR lingered at 1.75% as buyers capitalise on the then lower interest rates. They believe that OPR will likely stay on at 3.00% for the rest of CY23 with November 2023’s MPC meeting left pending. For the time being, we anticipate OPR to remain flattish at 3.00% for the rest of CY24 as well on the back of well-contained inflation with a modest trajectory of economic performance.
Margins downside seemingly bottomed
Still bearing some pressures from the intense deposits competition in Dec 2022, some players continued to see compression in NIMs while some have begun to register improvements. Kenanga believes most signals have pointed to the end of the downturn as corporates have also been holding back in deposit pricing. Further reflecting this are broad guidance for stability throughout the rest of CY23, barring any unforeseen shifts in OPR, which they expect to remain unchanged. That said, on a YoY basis, the banks would still report an overall degrading of margins with some anticipating up to a double-digit compression.
Asset quality fairly unalarming
Despite rising interest rates and inflationary pressures, sector gross impaired loans (GIL) stayed flattish. This could be attributed to repayment pressures being mostly gradual thanks to BNM’s mindful approach to not excessively raise OPR. Kenanga had also gathered that repayment assistance accounts continue to diminish as a proportion of the banks’ overall books with a handful still seeking relief.
On that note, the investment bank does not anticipate any worsening of GIL to be significant as near-term macros are expected to remain stable. Between the banks, MBSB reported the highest GIL no thanks the unfavourable performance of its commercial portfolio.
Meanwhile, PBBANK (OP; TP: RM4.75) and HLBANK (OP; TP: RM24.20) remain as the leading benchmark in asset quality, with GILs of 0.55% and 0.57%, respectively, in 2QCY23 for their highly retail-centric.
