Investment Highlights

• Industry loan growth gained momentum to register a higher growth of 5.0% YoY in Apr 2022 supported by higher nonhousehold loan growth of 5.1% YoY. Lending for working capital loans expanded at a faster pace. Household loan growth remained stable at 4.9% YoY. YTD, the industry’s annualised loans have grown by 5.1% in line with our expectation of 5–6% growth for 2022 supported by GDP growth of 5.6%.

• CASA growth accelerated to 10.1% YoY in Apr 2022, raising the sector’s CASA ratio to 32.9%. The sector’s LCR strengthened to 157% while net stable fund ratio rose to 119%.

• New impaired loans’ formation eased to a slower rate of 1.9% MoM. GIL ratio inched up to 1.6% while NIL ratio was sustained at 0.9%.

• Total provisions for the sector rose marginally by 0.4% MoM or RM142mil in Apr 2022. We expect a top-up of management overlays to be significantly lower ahead as loans under relief assistance (RA) continued to taper and a higher percentage of borrowers resuming repayments after the expiry of the Pemulih moratorium. Repayments of borrowers with expired financial assistance are now close to that of pre-Covid-19 levels. In the near term, banks will continue to be prudent on provisions for potential credit losses with room seen on write-backs of management overlays in 2023.

• Bright spot for the sector remains the interest rate uptrend cycle which will increase interest income of banks and improving trend of provisions. We have imputed into our earnings estimates for banks 50bps in rate hikes (including 11 May 2022’s 25bp) for 2022. In 2H2022, we expect another hike of 25bps in 2H2022 raising the OPR from 2.00 to 2.25% which could come in as early of the next MPC meeting on 6 July 2022. In 2023, we have included into our net profit forecast another 50bps increase in the OPR. Base on our impact analysis, every 25bps hike OPR which will positively impact banks’ NIM by an average of 5–6bps and net profit by 3%.

• With markets lowering expectations of the aggressiveness of the Fed’s rate hikes after a stronger GDP contraction of 1.4% in the US in 1Q22, we have seen the 10-year MGS yield lowered to 4.2%. A lower or more stable yield is seen as positive on banks’ non-interest income ahead without the negative marked-to-market revaluation impact from securities holding.

• Retain our OVERWEIGHT stance on the sector with our top BUYs of RHB Bank (FV: RM7.40/share), CIMB Group (FV: RM6.60/share) and Maybank (FV: RM10.30/share). We expect banks to report stronger earnings in 2023 supported by higher total income and lower provisions. Also, Cukai Makmur will no longer impact banks earnings in 2023.

Source: AmInvest Research - 3 Jun 2022