Investment Highlights

• Industry loan growth picked up pace to 5.7% YoY in Dec 2022 from 5.5% YoY in Nov 2022. This was in line within our expectation of a 5%-6% growth for 2022. Household loan growth eased slightly to 5.9% YoY in Dec 2022 while nonhousehold loans expanded at a faster pace of 5.3% YoY. Lending for working capital loans registered a higher growth rate of 6.1% YoY (Nov 2022: 5.5% YoY). For 2023, we continue to expect a slower loan growth of 4%-5% which is 1x of our economist’s GDP growth forecast of 4.5%.

• Loan applications and approvals continued to trend downwards in Dec 2022 with negative growth rates.

• Notwithstanding a pause in OPR hike in the recent MPC meeting on 19 Jan 2023, we are still maintaining our view of another OPR increase of 25bps, normalising the benchmark interest rate to 3.00% in 1H2023. The 3-month KLIBOR rate remained sticky at 3.68% against the present OPR of 2.75%, implying that the market is still pricing in another 1-2 rate hikes domestically.

• Growth of low-cost deposits continued to taper, leading to a slight decrease in CASA ratio to 30.1%. Deposit growth continued to hold up at 5.9% YoY in Dec 2022. LD ratio for the sector remained steady at 86%. Correspondingly, the sector’s loan-to-fund was stable at 82.4% while the loan-to-fund and equity ratio held up at 72%.

• Loan impairments decreased by 5.2% MoM or RM1.9bil while total provisions for the sector fell by 5.1% MoM or RM1.8bil in Dec 2022. The sector GIL ratio improved slightly to 1.7% from 1.8% in the preceding month while NIL ratio was sustained at 1.1%. Including regulatory reserves, loan loss coverage (LLC) rose to 118.2% vs. 116.5% in the previous month.

• Presently, the 10-year MGS yield has declined further to 3.8% and our economic team expects it reach between 3.8%-4% by end-2023. However, a Fed pivot with a less hawkish stance on US rate increase could potentially see the MGS yield moving below 3.8%. An end to interest rate hikes in 1H2023 with the US treasury and MGS yield trending lower are seen as positive for treasury and markets income for banks. The decrease in MGS yield will be a boon to banks’ trading income with the likelihood of unwinding of marked-to-market losses of securities portfolio, which was incurred in 2022 when the yield spiked.

• Retain our OVERWEIGHT stance on the sector with top BUYs on RHB Bank (fair value: RM7.40/share), CIMB Group (fair value: RM6.70/share) and Bank Islam (fair value: RM3.20/share).

Source: AmInvest Research - 3 Feb 2023