Investment Highlights

• Industry loan growth moderated to 4.9% YoY in Jan 2023 (Dec 2022: 5.7% YoY), contributed by a slower pace of household and non-household loans. Household loan growth eased to 5.6% YoY while non-household loans slipped to 3.9% YoY due to slower pace of working capital loans. For 2023F, we retain our loan growth expectation of 4%-5%.

• Improvement in growth of loan applications and approvals in Jan 2023.

• Still expecting OPR to normalise to 3.00% with another 25bps increase in 1H2023. We see a likelihood for a pause in the OPR hike in the next MPC meeting on 9 Mar 2023 with OPR retained at 2.75%. The 3-month Klibor rate has eased slightly of late. Recently, industrial activities and exports have softened, and this would warrant a longer observation period before making a further change to the interest rate. We expect the OPR to normalise to 3.00% only in 2Q2023 with inflation rate remaining elevated.

• Momentum for low-cost deposits continued to be slow with CASA ratio declining further to 29.8%. Deposit growth accelerated to 7% YoY with LD ratio steady at 86%.

• A mild uptick in loan impairments by 0.4% MoM or RM140mil while total provisions for the sector continued to trend lower. The sector GIL ratio was sustained at 1.7% while NIL ratio remained steady at 1.1%. Including regulatory reserves, loan loss coverage (LLC) stood at 117.1% vs. 118.2% in the previous month (LLC without regulatory reserves: 97.4%). We continue to expect credit cost for banks to be lower in 2023 compared to 2022 with the management of some banks such as Public Bank and RHB Bank alluding to some release of management overlays this year.

• The 10-year MGS yield is likely to continue rising in the short term due to uncertainties in US interest rates. However, our economic team expects MGS yields of between 3.8%-4% towards the end of 2023. Hence, we do not foresee the substantial marked-to-market losses on revaluation of securities portfolio incurred by banks in 2022 to be repeated in 2023.

• Starting to see banks (Maybank and CIMB) paying out all cash dividends without the option for dividend reinvestment (DRP). This is seen as positive on valuation without the dilution of ROE from additional shares issued through DRP.

• No drag on banks’ earnings from Cukai Makmur in 2023.

• Retain our OVERWEIGHT stance on the sector with top BUYs on RHB Bank (fair value RM7.10/share), CIMB Group (fair value: RM6.50/share) and Alliance Bank (fair value: RM4.40/share).

Source: AmInvest Research - 3 Mar 2023