System loans in Dec 2023 increased by 5.3%, surpassing Kenanga Researches’ 4.0%-4.5% expectation, thanks to strong MoM influx of working capital loans. While this may be due to further frontloading to meet a relatively later CNY season, as seen by a spike in applications. Industry GIL remained light at 1.65% and is expected to remain at these levels which are pre-pandemic levels.
Kenanga Research (Kenanga), a division of Kenanga Investment Bank, in its Sector Update said today (Feb 2) deposit growth was also slightly above expectations at 5.6% (from our anticipated 5.0%-5.5%) with CASA levels likely to widen in the near term to fuel festive spending.
Kenanga expects the OPR to remain at a steady state of 3.0% till end-CY24, with any changes likely to be downside biased concurrently with regional monetary policies.
Kenanga maintains their OVERWEIGHT call on the sector, with its resilience to be emboldened by better economic prospects fuelled by infrastructure projects and investments. For 1QCY24, Kenanga highlighted: (i) MAYBANK (OP; TP: RM9.95) for its strong dividend proposition (c.7%) with its market leader positioning likely to tap into the abovementioned economic drivers, (ii) AMBANK (OP; TP: RM4.80) for its consolidation prospects and possible knee-jerk interest from tax credits, and (iii) ABMB (OP; TP: RM4.30) as a small cap favourite given its largely comparable fundamentals which beats certain large caps.
Closing with a bang
In Dec 2023, system loans grew by 5.3% YoY which beat Kenanga’s CY23 expectation of 4.0%-4.5% where they had expected slower MoM lending but it came in at +1.1% MoM.
The surprise was led by an influx on business loans (+1.8%, mainly for working capital) which could be concentrated towards financial services and retail industries.
On the other hand, household loans grew +0.6% MoM with residential property being the largest growth component.
With a strong momentum closing up CY23, Kenanga opined conditions may be more favourable for borrowing with OPR expected to remain stable and may open room for more competitive financing rates. Kenanga projects CY24 loans growth range between 5.5%-6.0%.
Applications flowing in
On a YoY basis, Dec 2023 applications rose by 30% with similar support from both household and business loans, which Kenanga warrants could be a result of a later CNY season in Feb 2024 (as compared to 2023’s Jan celebration).
This is backed by a +6% MoM growth (Nov 2023: -19% MoM) but with households (+12%) seemingly loading up on personal loans, possibly for festive spending.
Narrowing GIL trends
Kenanga continues to see industry GIL reporting sequential improvement at 1.65% (Nov 2023: 1.69%, Dec 2022: 1.72%). They also see industry loan loss coverage lingered at 92.0% (Nov 2023: 92.9%, Dec 2022: 98.3%) which could serve as a sweet spot for in the industry as concerns of pandemic-related delinquencies dissolve.
Kenanga noted that pre-pandemic loan loss coverage typically averages between 90%-100%. While most banks have reflected some writebacks over the past few months, larger cap banks still possess substantial buffers which may further dilute industry readings should they finally decide to net out their provisions.
Seasonal deposits flowing in
System deposits grew by 5.6% YoY, which is slightly above our CY23 deposits growth target of 5.0%-5.5%, resulting from a strong 1.3% MoM typical of the year-end season as banks offer highly competitive deposit rates to secure cheaper funding costs.
CASA stayed relatively stable at 28.5% (Nov 2023: 28.4%, Dec 2022: 29.0%) which we suspect may extend in the coming months in lieu of upcoming festive spending.
Kenanga maintains OVERWEIGHT on the banking sector and believe the sector will continue to show resilience based on a stronger economic backbone, with CY24 expected to be supported by the roll-out of public infrastructure projects with foreign investors renewing interest.
On the flipside, household spending may be pinched by tax reforms and the progressive implementation of targeted fuel subsidies.
Kenanga expect sBNM to be cognisant of these factors and may keep OPR stable throughout CY24 to keep overall activities intact, with higher possibility of downside adjustment in line with the anticipated softening of monetary policies from leading markets.
Kenanga’s sector top picks for 1QCY24 is AMBANK as its plausible consolidation angle is validated by its rejuvenated earnings with an anticipated knee-jerk interest following an upcoming tax credit gain in 1QCY24.
Kenanga said some attention needs to be given to MAYBANK for its sustainable and leading dividend returns amongst the large cap banks (c.7%). Being the leading bank in terms of market share, MAYBANK could also be viewed as the best beneficiary for stronger economic activity.
As for small cap banks, ABMB remains Kenanga’s favourite for its solid fundamentals which are comparable to its large cap peers. Additionally, its leading CASA level may provide the group nimbleness to balance its interest margins with market share acquisition strategies.
Growth in 4Q23 LLP likely still benign
Meanwhile, CGSCIMB said today the banking industry recorded a loan growth of 5.3% in 2023, ahead of our
projected growth of 4-5%. The growth in banks’ 4Q23 LLP should be benign (close to 4Q22’s level of RM1.46bn), as deduced from decline of RM503.7m in 4Q23’s total provision.
CGSCIMB reiterates an Overweight call on banks, premised on potential write-backs in management overlay and increases in dividend payout ratios.
2023 loan growth above our forecast; project 4-5% growth in 2024F
In CGSCIMB’s report dated 2 Jan 2024, they stated that the banks would have achieved their projected loan growth of 4-5% for 2023F as the industry’s total loan expanded by 4.2% in 11M23 (from end-Dec 22 to end-Nov 23). On a positive note, the industry’s total loan grew by an impressive 1.1% mom in Dec 23 to record a loan growth of 5.3% in 2023 (+5.6% for household loan and +3.6% for business loan), ahead of our forecast of 4-5%.
CGSCIMB was projecting a slower loan growth of 4-5% in 2024F, with a potential slowdown in auto loan growth from 9.7% in 2023 to low single-digit rates in 2024F, on the back of their expectation of weaker auto sales in 2024F.
A significant pick-up in yoy loan growth in Nov 23 and Dec 23
Tracking the yoy loan growth (for end of every month), the growth momentum has been accelerating strongly from 4% yoy at end-Oct 23 to 5.3% yoy at end-Dec 23. The key catalyst was improvement in business loan growth (from 1.1% yoy at end-Oct 23 to 3.6% yoy at end-Dec 23). This was in line with their expectation of an uptrend in loan growth on improved business confidence following the state elections on 12 Aug 2023 — the federal government managed to retain control of three key state governments, which signalled increased political stability for the rest of its term.
Growth in 4Q23 LLP likely benign
CGSCIMB thinks that banks’ 4Q23 loan loss provisioning (LLP) would be close to (or even lower than) 4Q22’s RM1.46bn (i.e. flattish or a decline yoy). This is deduced from the decline of RM503.7m (-1.5% qoq) in the total provision of the banking industry in 4Q23.
Although AMMB could significantly increase its LLP in 4Q23 (as stated in our report dated 8 Jan 2024), its LLP increase could be offset by much lower provisions and/or write-backs of management overlay by other banks, in their view.
Reaffirm Overweight on banks
CGSCIMB reaffirms their Overweight call on banks, supported by the sector’s strong dividend yield of 5.1% for CY24F.
Re-rating catalysts include potential write-backs in management overlays and increases in dividend payouts as more banks embark on capital management initiatives.
Potential downside risks would be a material deterioration in loan growth and asset quality. CGSCIMB picks for the sector are Hong Leong Bank, Public Bank and RHB Bank.
