KUALA LUMPUR (Aug 2): Analysts anticipate that the banking sector will stay in a positive trajectory in the second half of the year despite a slower growth in business loans reported.

According to the Bank Negara Malaysia (BNM) Monthly Highlights report for June 2023, Malaysia's credit to the private non-financial sector was broadly sustained at 3.9%, compared with 4% in May 2023, although credit to businesses grew at a slower pace of 2.6%, versus 2.8% previously.

In a note on Wednesday (Aug 2), Maybank Investment Bank Bhd analyst Desmond Ch'ng maintained a “positive” rating on banks, even though loan growth of 4.4% in June 2023 currently trails its full-year loan growth forecast of 5% for the year.

“Nevertheless, we expect a pick-up in loan growth in the second half (2H) [of 2023] amid easing inflationary pressures, stable interest rates and a stronger ringgit,” said Ch’ng.

Moreover, as margin pressure is abating, he expects it should contribute to better interest margins in the 2HFY2023.

The analyst noted that the current account savings account (CASA) ratio contracted for the sixth consecutive month, but by a lower 4.2% year-on-year (y-o-y) compared to 4.9% y-o-y in May 2023.

“The industry’s CASA ratio nevertheless improved to 29.3% end-June 2023 from 28.9% end-May 2023 and compares against a pre-Covid CASA ratio of 26.5% end-Dec 2019,” he said.

He observed that headline inflation eased further to 2.4% in June 2023 from 2.8% in May 2023, and as a result, opined that the return on deposits turned positive for the first time since Feb 2021, and this relieves pressure on interest rate hikes.

Maybank Investment's preferred bank stocks are CIMB Group Holdings Bhd with a "buy" call and a target price (TP) of RM6.15, AMMB Holdings Bhd (Buy, TP: RM4.15), Alliance Bank Malaysia Bhd (Buy, TP: RM4), Hong Leong Bank Bhd (Buy, TP: RM22.70), Hong Leong Financial Group Bhd (Buy, TP: RM22.20) and RHB Bank Bhd (Buy, TP: RM6.40).

CGS-CIMB Research analyst Winson Ng, who also reiterated his “overweight” call on banks, said that the research house is “not overly concerned about the moderation in loan growth”.

“We are not overly concerned about the weakening of the loan growth as even if loan growth disappoints, we do not expect loan growth in 2023 to be far below our projected 4% to 5%, and every 1% point cut in our loan growth projection would only lower our calendar year of 2024 (CY2024) forecast net profit by 0.8%, based on our estimate,” said Ng.

He viewed June's month-on-month (m-o-m) drop of RM796.5 million in gross impaired loans (GIL) positively, as it was the largest m-o-m decline in 1H2023.

“This lowered the banking industry’s GIL ratio from 1.8% at end-May 23 to 1.76% at end-Jun 23. Based on the latest trends, we think that GIL ratio should peak soon. Hence, we see minimal risk of GIL ratio surpassing our end-2023 projection of 2%,” he said.

The analyst is also positive on the banking sector following the potential further quarter-on-quarter (q-o-q) decline in the second quarter of 2023 (2QFY2023) in loan loss provisioning (LLP).

“We were positive on the 35.7% q-o-q fall in the sector’s LLP to RM937.6 million in 1Q2023. It is even more encouraging that the LLP would decline further in 2QFY2023, deduced from the massive RM1 billion reduction in the banking industry’s total provision (the cumulative provision provided by banks over time) in 2Q2FY2023, compared to a decrease of RM134.1 million in 1Q2023.

Thus, CGS-CIMB reaffirmed its "overweight" call on banks, predicated on potential re-rating catalysts of sequential improvement in net interest margin in 2QFY2023 to 4QFY2023, and potential write-back of management overlay.

"We estimate every 10% write-back in management overlay would enhance our projected FY2023 to FY2024 forecast net profits by 1.7%. Sector valuations are also attractive at 9.5 times CYFY2024 forecast price-earnings, while the dividend yield looks compelling to us at 5% in CY2023," he added.

CGS-CIMB's top pick is RHB Bank (Add, TP: RM7.62) due to its attractive valuation and dividend yield as well as a potential increase in dividend payout, while the potential downside risks for its sector rating would be a deterioration in loan growth and asset quality.

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BNM: Sustained credit growth in June despite slower business loan growth