KUALA LUMPUR (June 1): Hong Leong Investment Bank (HLIB) Research noted in a Wednesday (June 1) report that it believes the banking sector still has some legs to run as “valuations continue to be undemanding”.

It added that "we are on the cusp of an overnight policy rate hike upcycle with economic recovery, which benefits banks".

“Besides, they have the headroom to perform management provision overlay write-backs or act as buffers in event of deteriorating asset quality.

"However, there are pockets of concerns like acute current account savings account substitution to fixed deposit (capping net interest margin expansion) and inflationary cost pressures. As such, we employ a selective buying strategy,” HLIB Research noted, maintaining its "overweight" call on the sector.

For large-sized banks, it likes Malayan Banking Bhd (Maybank), with a target price (TP) of RM9.70, for the latter's strong dividend yield.

For mid-sized banks, HLIB Research favours RHB Bank Bhd (TP: RM7) for its high common equity Tier 1 ratio and attractive price tag.

“As for small-sized banks, BIMB (Bank Islam Malaysia Bhd) (TP: RM3.30) and Affin Bank Bhd (TP: RM2.35) are preferred. We like the former for its positive structural growth drivers and better asset quality, while the latter has the potential for special dividends and strong financial metrics,” the research house added.

Latest banking data showed that loan growth gained traction in April 2022 to 5% year-on-year (y-o-y), after 4.6% in March, supported by both the household and business segments, which rose 4.9% (March: +4.9%) and 5.7% (March: +4.5%) respectively, HLIB Research said.

“For the household segment, the expansion came from mortgage and auto loans. As for the business segment, it was lifted by working capital financing. Overall, system loan growth was within our full-year 2022 expectations of 4.5% to 5%,” it added.

It also said that leading indicators were mixed, where loan applications nudged down 0.5% y-o-y (March: +5.1%). This was stalled by both the household (-4.7% versus March's +0.1%) and business segments (+6.8% versus March's +13.7%).

However, HLIB Research said loan approvals quickened, up 19.1% (March: +13.4%), as business lending became more accommodative (+42.9% versus March's +14.4%), but for the household segment, it turned tighter (+6% versus March's +12.7%).

It also pointed out that asset quality showed some weakness as the gross impaired loans (GIL) ratio nudged up two basis points (bps) month-on-month to 1.57%, dragged by both the household (+3bps) and business segments (+2bps).

“We already expected the GIL ratio to increase but like before, we are not overly worried since banks have made heavy pre-emptive provisions in 2020-21, and we reckon that credit risk has been adequately priced in by the market, seeing the fairly high NCC assumption utilised for 2022-23 by both us and the consensus (still above the normalised pre-Covid-19 run rate but below 2020-21’s levels),” the research house added.