Both system loans and deposits growth gained momentum to +5.0% and +6.2% YoY respectively. However, leading indicators were mix and asset quality was a tad weaker. For NIM, we expect it to expand from OPR hikes but the magnitude could be capped by eventual downward normalization of CASA mix. Overall, we believe the sector still has some legs to run as valuations remain undemanding and we are only at the cusp of an OPR upcycle with economic recovery, which benefit banks. Maintain OVERWEIGHT and BUY ratings include: Maybank, RHB, BIMB, Affin.

Loans growth gained traction in Apr-22 to +5.0% YoY (Mar: +4.6%) supported by both the household (HH) and business (Biz) segments, which rose 4.9% (Mar: +4.9%) and 5.7% (Mar: +4.5%) respectively. In HH, the expansion came from mortgage and auto loans. As for Biz, it was lifted by working capital financing. Overall, system loans growth was within our full-year FY22 expectation of +4.5-5.0%.

Leading indicators were mix, where loan applications nudged down 0.5% YoY (Mar: +5.1%); this was stalled by both HH (-4.7% vs Mar: +0.1%) and Biz (+6.8% vs Mar: +13.7%). However, loans approval quickened to +19.1% (Mar: +13.4%) as business lending became more accommodative (+42.9% vs Mar: +14.4%) but HH turned tighter (+6.0% vs Mar: +12.7%).

Deposits growth expanded faster again to 6.2% YoY (Mar: +5.2%) due to stronger CASA and foreign currency deposits. Overall, Apr-22’s loan-to-deposit ratio remained flat MoM at 87% (vs Feb-18’s peak of 89%). We understand the current deposit taking landscape continues to be competitive.

Asset quality showed some weakness as gross impaired loans (GIL) ratio nudged up 2bp MoM to 1.57%, dragged by both the HH (+3bp) and Biz segments (+2bp). 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 increased 8bp MoM while the 3-mth board fixed deposit rate held steady. In turn, interest spread expanded 8bp. Similarly, we expect net interest margin (NIM) to widen from OPR hikes but the magnitude could be capped by eventual downward normalization of CASA mix.

Retain OVERWEIGHT. We believe the sector still has some legs to run as valuations continue to be undemanding and we are only at the cusp of an OPR hike upcycle with economic recovery, which benefit banks. Besides, they have the headroom to perform management provision overlay writebacks or act as buffers in event of deteriorating asset quality. However, there are pockets of concerns like acute CASA substitution to FD (capping NIM expansion) and inflationary cost pressures. As such, we employ a selective buying strategy. For large-sized banks, we like Maybank (TP: RM9. 70) for its strong dividend yield. 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: RM3.30) 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 the potential for special dividends and strong financial metrics.

Source: Hong Leong Investment Bank Research - 1 Jun 2022