Investment Highlights

• Industry loans continued to gain traction to register an improved growth rate of 5.9% YoY in July 2022. July 2022 saw stronger household loan growth of 6.1% YoY while non-household loans expanded by 5.5% YoY. Mortgage and loans for purchase of vehicles supported the growth of household sector loans. Meanwhile, lending for working capital loans grew by 7% YoY, contributed by loans to SMEs. YTD, the industry’s annualised loans have grown by 5.2%, within our expectation of 5–6% expansion for 2022.

• Higher levels of loan applications from non-households in July 2022. July 2022 saw a healthy loan application growth of 80% YoY which was seen as supportive of the momentum of financing in 2H22.

• Softer CASA growth of 6.7% YoY leading to lower CASA ratio of 31.9%. LD ratio for the sector was sustained at 87% while LCR increased to 151% following the stronger ratios of commercial and investment banks.

• Expect another 25bps hike to increase the OPR from 2.25% to 2.5% at the coming MPC meeting on 8 Sep 2022. This is based on movements in the 3-month KLIBOR and the shorter 1-year swap rate which has already priced in the rate hike. The increase in interest rates has been baked into our earnings estimates for banks. The OPR is expected continue to gradually increase to 3.00% (pre-pandemic level) and we see the likelihood of another 25bps rate hike in November 2022.

• Continued upticks in loan impairments post-expiry of financial assistance. Nevertheless, the sector GIL ratio only inched higher to 1.8% in July 2022 while NIL ratio stood at 1.2%.

• Total provisions for the sector decreased marginally by 0.1% MoM or RM41mil in July 2022. The banking system’s loan loss coverage including regulatory reserves was 113%. Excess capital buffers remained healthy at RM129.6bil.

• The 10-year MGS yield reversed in July 2022. We continued to see a more stable MGS yield in 2H22 after the acceleration of US Fed rate hikes of 75bps in both June and July 2022. As a result, we expect banks’ earnings from treasury (trading and investment income) to improve in 2H22 compared to 1H22.

• Retain our OVERWEIGHT stance on the sector with our top BUYs on RHB Bank (fair value RM7.40/share), CIMB Group (fair value: RM6.70/share) and Maybank (FV RM10.30/share).

Source: AmInvest Research - 5 Sept 2022