Banking Sector Robust With System Loans, Deposits Increase In March: Analysts Say

The Mar 2024 Banking sector system loans increased by 6.0%, within 5.5%-6.0% expectations for CY24 and continued to be dominated by households although Kenanga is seeing business books gradually picking up on  better economic prospects.

Kenanga Investment Bank (Kenanga) said today (May 2) that industry GIL improved further to 1.62%, being at the lower range of  historical averages of 1.6%-1.8%.

Deposits growth was moderate (+5.0%) as depositors awaited better rates in 2H.

Kenanga anticipates the OPR to remain at 3.00% throughout CY24, with any change likely  to have a downside bias. They maintain their OVERWEIGHT call on the sector, with its resilience to  be emboldened by better economic prospects fuelled by infrastructure projects and investments. 

For 2QCY24, Kenanga picks: (i) PBBANK (OP; TP: RM5.10) for sustainable performances from its  mortgage books, (ii) RHBBANK (OP; TP: RM7.25) for its leading dividend prospects, and (ii)  ABMB (OP; TP: RM4.30) as a small cap favourite given its largely comparable fundamentals  which beats certain large caps. 

Bigger load up. In Mar 2024, system loans grew by 6.0% YoY which is within our projected 5.5%-6.0% target for CY24.  Households (+6.3%) led with higher mortgages while we also noted a rise in non-residential property accounts to fuel  commercial use.

Business loans also picked up (+5.6%) with financial service industries showing the strongest improvement. On a MoM basis, business loans (+0.9%) came in better than households (+0.5%) with working capital needs also rising, with  demand likely spurred by Raya festivities.

Applications swing seasonally. From a higher base in Mar 2023, Mar 2024 applications came off (-13%) from both household  (-11%) and business (-15%) YoY. That said, there was an influx of new MoM applications from consumers (+25%) and  businesses (+14%) following Feb 2024’s cooling off amidst Chinese New Year celebrations, whereas more loans may be sought  to support Hari Raya spending.

GIL narrows further. Industry GIL eased to 1.62% (Feb 2024: 1.64%, Mar 2023: 1.74%) with industry loan loss coverage being  progressively utilised at 92.1% (Feb 2024: 92.4%, Mar 2023: 95.9%). The better health of assets could be tied to improved  repayment abilities as economic activities return, with excess provisions by the banks likely to be written back overtime.

From  our channel checks, Kenanga noted that certain banks have already written back all of its pandemic-related overlays.

Demand for cash sustained. Mar 2024 system deposits grew 5.0% YoY (+0.82% MoM) which is below Kenanga’s 5.5%-6.0% growth  expectations for CY24 for now.

They reckon as banks are progressively repricing down their fixed deposit offerings, depositors  may hold back in committing to longer term deposits which may see a spike in the latter half of CY24 as the banks are  seasonally more competitive then. Meanwhile, CASA ratio at present moment is fairly stable at 28.6% (Feb 2024: 28.7%, Mar  2023: 28.1%).

Kenanga maintains OVERWEIGHT on banking sector. Market tailwinds (i.e. persistent loans growth and GDP, better margin  retention) are expected to continue outweighing industry headwinds (i.e. inflationary pressures, weaker MYR), which Kenanga believes may lead to fewer tests to the sector’s resiliency. The sector should be of interest with dividend yields still appearing attractive  (6%-7%) on most names on top of lower embedded sector volatility as compared to other industries. Kenanga had seen meaningful  moves in share prices with the inflow of foreign investors looking to accumulate sector heavyweights.

Kenanga’s sector top picks for 2QCY24 include PBBANK which could see better leverage on its heavy retail mortgage mix in a stable OPR environment. They also see its possible overlay write-backs to be a catalyst for more generous dividend payouts which may  mirror more frequent payouts during the year.

RHBBANK is also favoured for its dividends which Kenanga projects to be the leader  (7%-8%) amongst its peers.

Meanwhile, its associate Boost Bank may soon enter the public domain which could garner greater  interest in the near-term. 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.

Meanwhile, RHB Investment Bank (RHB) Malaysia Sector Update note today said system loan growth remained robust in March, and increased by 6% YoY.

Other highlights from RHB’s reading of the numbers include a rise in CASA deposits and resilient asset quality.

RHB’s Top Picks are CIMB, AMMB, Hong Leong Bank, Alliance Bank Malaysia, and Public Bank. RHB maintain sector NEUTRAL, as they do not expect a meaningful earnings outperformance from the sector despite the macroeconomic backdrop being more upbeat.

System loans grew 6% YoY (+1% QoQ, +1% MoM) in March, driven by the household (+6% YoY), finance (+15%), and wholesale & retail trade (+9%) segments.

RHB also saw consumer loans such as residential mortgages (+7%), credit cards (+10%) and hire purchase loans (+10%) maintaining above industry growth rates, while loans for working capital purposes grew at a softer clip of 5% YoY.

QoQ, RHB also saw a pick-up in loans for the purchase of non-residential properties (+2% QoQ, +6% YoY). The banking system is currently growing faster than then forecasted at 4.5-5% YoY target for 2024, which they keep for now.

RHB noted that YTD loan applications and approvals have been flat YoY and – assuming this trend remains put – coupled with the base effect from loans growth picking up towards end-2023, overall growth could decelerate in the later part of the year.

Mar 2024 saw healthy loan applications amounting to MYR117bn (+21% MoM, -13% YoY) in view of the festive period in April. On a cumulative basis, system loan applications in 3M24 were up 1% YoY. Loan disbursements, however, were flat YoY, with softer disbursements to businesses.

RHB thinks business loan disbursements could pick up later in the year with the gradual rollout of big-ticket development projects, and especially if greater macroeconomic clarity emerges.

System deposits grew 5% YoY (+1% QoQ, +1% MoM), mostly driven by nonretail deposits.

CASA grew by a faster 7% YoY (+2% QoQ, flat MoM), which they believe could be partly due to the launch of several digital banks’ maiden CASA offerings.

Feedback from the banks indicates that the competition for deposits has eased from the Dec 2023-Feb 2024 period, but this may pick up in 2H24 – especially if the momentum of loan growth remains as solid.

Asset quality still sturdy. System GILs eased 1% QoQ (+1% YoY, -1% MoM), mostly thanks to a drop in working capital GILs. Sector-wise, the GIL decrease was roughly broad-based, but the household sector did record a slight GIL uptick of 2% QoQ (+8% YoY, -1% MoM).

All in, the system GIL ratio eased 3bps QoQ to 1.62% (Mar 2023: 1.71%), and banks remain well-covered with a healthy system LLC of 92% (Dec 2023: 92%, Mar 2023: 98%).

Other highlights. Capital ratios appear adequate – the CET-1 and total capital ratios have been largely stable since Jan 2023 at 14-15% and 18-19%. The banking system also remains decently liquid, with an 86% loans-to-deposits ratio and 150% liquidity coverage ratio, i.e. more or less similar to the average levels in 2023, RHB added.

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