Investment Highlights

• Industry loan growth eased to 4.2% YoY in July 2023 (June 2023: 4.4% YoY), attributable to slower growth in nonhousehold loans. Growth in working capital loans slowed down in July 2023. Meanwhile, household loan growth rose marginally to 5.4% YoY in July 2023 vs. 5.3% YoY in June 2023, contributed by faster pace of loans extended for purchase of passenger vehicles, residential property and personal use. Growth of industry loans remain within our expectation of 4%-5% for 2023F. July 2023 saw slower expansion of credit to mining, quarrying, utilities, wholesale, retail, restaurants, hotel, construction, real estate, finance, insurance and business services sectors.

• Improvement in growth of loan applications and approvals in July 2023. In July 2023, overall loan applications registered a lower contraction of -6.3% YoY compared to -8.9% YoY in June 2023. The improvement was contributed by a pickup in the pace of household applications. Meanwhile, approvals of household and non-household loans registered stronger growth in July 2023.

• Growth in deposits moderated with lower CASA ratio. Deposit growth moderated to 5.3% in July 2023 vs. 5.9% YoY in June 2023. LD ratio for the sector rose marginally to 86.1% in July 2023. The sector’s loan-to-fund ratio/loan-to-fund and equity ratio increased slightly to 82%/71.2%. Sector LCR climbed to 155% from 154% in the preceding month supported by higher LCRs of commercial and investment banks. CASA growth continued to slow and contracted by 4.2% YoY in July 2023 leading to a lower CASA ratio of 29%.

• Slight uptick in loan impairments but provisions remain stable in July 2023. The industry’s GIL ratio stayed at 1.8% in July 2023. Meanwhile, NIL ratio sustained at 1.1%. The sector’s loan loss cover (LLC) fell to 91.5% in July 2023 (June 2023: 91.9%), attributed to upticks in loan impairments.

• Net funds raised in the market by the private sector climbed to RM10.5bil in July 2023 compared to RM6.9bil in June 2023. This was largely attributed to a lower redemption of bonds and sukuks.

• The sector's CET1/Tier 1/Total capital ratios improved to 15.1%/15.6%/18.8%.

• Retain our OVERWEIGHT stance on the sector with top BUYs on RHB Bank (fair value: RM6.70/share), CIMB Group (fair value: RM6.70/share) and Hong Leong Bank (fair value: RM24.10/share). We downgrade our call on Public Bank from BUY to HOLD with an unchanged fair value of RM4.70/share after the recent run up in share price resulting in an expected total return of less than 15%.

Source: AmInvest Research - 5 Sept 2023