Investment Highlights

• Industry loan growth remained stable at 4.2% YoY in Aug 2023 similar to the preceding month. The modest increase in growth of household loans supported by loans for purchase of residential property and passenger vehicles were offset by a slower pace of non-household loans. Growth in working capital loans moderated in Aug 2023. Aug 2023 saw a slower pace of loans to most sectors including the household sector. Industry loan growth remained within our expectation of 4%-5% for 2023F. For now, we expect a loan growth of 4% for the industry in 2024F.

• Continued uptick in loan impairments with a marginally higher provisions in Aug 2023. The industry’s GIL ratio stayed at 1.8% in July 2023. Meanwhile, the NIL ratio was sustained at 1.1%. The sector’s loan loss cover (LLC) fell to 90.6% in Aug 2023 (July 2023: 91.5%), attributed to further upticks in loan impairments.

• Maintain our 2023F calendarised core earnings growth of 4.7%. Trimmed our 2024F earnings growth for the sector to 4.6% from 7% after factoring in a lower non-interest income (NOII) estimate for banks. We project a decline in NOII estimate for banks by 7.4% in 2024 (2023: marginal growth of 2%).

• Recommendations for 3 stocks (Maybank, Alliance and Bank Islam) downgraded from BUY to HOLD. Fair value for Maybank/Alliance/Bank Islam lowered to RM9.50/RM3.60/RM2.20 per share (previously: RM10.00/RM4.00/RM2.50 per share) (Exhibit 19).

• Downgrading the sector from OVERWEIGHT to NEUTRAL. With expectation of no further OPR hikes from the present 3% ahead, we see limited earnings catalysts on the banking stocks. We downgrade the sector to NEUTRAL premised on the following:
  i) The stronger non-interest income (NOII) of banks from investment and trading income which cushioned weaker net interest income (NII) as a result of NIM compression in 1H23 will not be sustainable moving forward. The 10-year MGS yield has recently risen again to between 3.9% to 4%, tracking the rise in US treasury yields with the Federal Reserve turning hawkish on interest rates. The US monetary policy is anticipated to remain tight going into 2024. Hence, our earlier expectation of further gains to the bond/securities portfolio of banks will not be forthcoming. This is in view that the 10-year MGS yield is not likely to decline to the level that we expected in the near term;
  ii) Credit cost is already seen as near pre-pandemic levels for banks with limited sizeable releases of management overlays expected in the near term. Banks are likely to remain prudent on provisions and will continue to hold substantial provision buffers to mitigate credit risk until improvements are seen in the macroeconomic outlook. Management of certain banks such as CIMB have alluded that they will be reallocating their Covid-19 related overlays to cover other forms of risk and iii)Flattish net interest margin (NIM) for banks at best in 2024F without any adjustments in benchmark interest rates.

• Our BUY calls are CIMB (FV: RM6.60/share), RHB (FV: RM6.50/share) and Hong Leong Bank (FV: RM22.60/share).

Source: AmInvest Research - 2 Oct 2023