System loans held steady at 4.7% YoY while deposits picked up momentum to 6.5%. Also, leading indicators remained robust. However, asset quality showed some weakness. For NIM, we expect it to be fairly stable in FY22 as better asset reinvestment yield and increase in OPR to offset the competitive deposit taking landscape. In our opinion, the sector’s risk-reward profile is still skewed to the upside as valuations are undemanding and we are only at the cusp of an OPR hike upcycle with economic recovery, which benefit banks. Stay OVERWEIGHT; BUY calls include: Maybank, Public, RHB, BIMB, Affin.

Loans growth in Feb-22 held steady at 4.7% YoY (Jan: +4.7%), backed by both the household (HH) and business (Biz) segments, which ticked up 4.7% (Jan: +4.7%) and 5.5% (Jan: +5.3%) respectively. In HH, the growth came from mortgage and personal financing. As for Biz, it was driven by working capital financing. Overall, system loans growth was within our full-year FY22 expectation of +4.5-5.0%.

Leading indicators stayed robust, with loan applications growing 13.0% YoY (Jan: +10.0%); this was fuelled by both the HH (+13.8% vs Jan: +13.1%) and Biz segments (+11.9% vs Jan: +4.2%). That said, loans approval moderated down to +18.0% (Jan: +24.4%) as lending to HH became tighter (+8.4% vs Jan: +29.7%) but Biz continued to be accommodative (+34.8% vs Jan: +16.5%).

Deposits growth picked up pace to 6.5% YoY (Jan: +5.8%) due mainly to stronger foreign currency deposits. Overall, Feb-22’s loan-to-deposit ratio was down 1ppt MoM to 86% (vs Feb-18’s peak of 89%). We gathered the current deposit taking landscape continues to be competitive.

Asset quality showed some weakness as gross impaired loans (GIL) ratio nudged up 3bp MoM to 1.53%, dragged by both the HH (+2bp) and Biz segments (+3bp). We already expected GIL ratio to increase but like before, we are not overly worried since banks have made heavy pre-emptive provisions in FY20-21 and we reckon credit risk has been adequately priced in by the market, seeing the fairly high NCC assumption utilized for FY22-23 by both us and consensus (still above the normalized pre-Covid- 19 run-rate but below FY20-21’s level).

Interest spread widened. Average lending rate expanded 4bp MoM while the 3-mth board fixed deposit rate held steady. In turn, the interest spread widened 4bp as well. That said, we expect net interest margin (NIM) to be broadly stable as better asset re investment yield and OPR hike to offset the competitive deposit taking landscape.

Maintain OVERWEIGHT. We believe the sector’s risk-reward profile is skewed to the upside as valuations are undemanding and we are only at the cusp of an OPR hike upcycle with economic recovery, which benefit banks. As such, we remain bullish and employ a rather broad stock buying strategy in 1H22. For large -sized banks, we like Maybank (TP: RM9.40) for its strong dividend yield and Public Bank (TP: RM4.80) for its large potential headroom to perform management provision overlay writebacks. For mid-sized banks, RHB (TP: RM7.00) is favoured for its high CET1 ratio and attractive price-tag. As for small-sized banks, BIMB (TP: RM3.45) and Affin (TP: RM2.35) are preferred; we like the former for its positive structural growth drivers and better asset quality while the latter has special dividends potential and strong financial metrics.

Source: Hong Leong Investment Bank Research - 1 Apr 2022