Both system loans and deposits growth gained momentum to +5.6% and +6.6% YoY respectively. Besides, leading indicators were strong and asset quality was resilient. As for NIM, we expect it to expand from OPR hikes but the magnitude may be capped by eventual downward normalization of CASA mix . Regardless, banks are still net beneficiaries of interest rate upcycle. Overall, we continue to view positively the banking sector and also, opine that the risk-reward profile is skewed to the upside; the cocktail of robust earnings growth and undemanding valuations will be impetus to drive performance. Maintain OVERWEIGHT; BUY calls include: Maybank, RHB, BIMB, Affin, Alliance.

Loans growth gained traction in Jun-22 to 5.6% YoY (May: +5.0%), backed by both the household (HH) and business (Biz) segments, which jumped 5.9% (May: +5.0%) and 5.8% (May: +5.4%) respectively. In HH, the spike came from mortgage, auto, and personal financing. As for Biz, it was led by working capital loans. Overall, the system loans growth beat our +4.5-5.0% full-year FY22 estimates; as such, we revise it up to +5.0-5.5% given strong economic recovery.

Strong leading indicators, seeing that loan applications expanded 41.7% YoY (May: +5.2%); this was backed by both the HH (+48.1% vs May: +4.9%) and Biz (+32.5% vs May: +5.7%) segments. Similarly, loans approval followed suit and rose by a quicker 53.0% (May: +22.9%) given generous financing to both HH (+55.4% vs May: +8.2%) and Biz (+50.1% vs May: +46.7%).

Deposit growth picked up momentum again to 6.6% YoY (May: +6.1%), thanks to the increase of CASA, FD, and other deposits. Overall, Jun-22’s loan-to-deposit ratio stayed flattish MoM at 87% (vs Feb-18’s peak of 89%). We gathered that the current deposit taking landscape is fairly benign.

Resilient asset quality, since Jun-22’s gross impaired loans (GIL) ratio was relatively unchanged at 1.65% (+1bp MoM); both HH and Biz demonstrated an uptick of only 1- 2bp. We still expect GIL ratio to rise but would not be overly worried since banks have made heavy pre-emptive provisions in FY20-21 to cushion for this. Besides acting as a buffer, writebacks might possibly be in the cards, considering that the loss coverage for vulnerable Covid-19 related loans is >100% on average. Moreover, FY22-23 NCC assumption used by both us and consensus are fairly elevated (above the normalized run-rate but below FY20-21’s level).

Interest spread widened. The average lending rate spiked up 11bp MoM while the 3- mth board FD rate increased by only 2bp. In turn, interest spread expanded 9bp. Also, we expect net interest margin (NIM) to widen from OPR hikes but the magnitude could be capped by eventual downward normalization of CASA mix. Regardless, banks are still net beneficiaries of interest rate upcycle.

Retain OVERWEIGHT. We still view positively the banking sector and opine that the risk-reward profile is skewed to the upside; the combination of robust profit growth and undemanding valuations will be impetus to drive performance. 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 point. For small sized banks, all three under our coverage are Buy calls for different reasons: (i) BIMB (TP: RM3.30) for its laggard share price showing, (ii) Affin (TP: RM2.35) is adored for its special dividends potential and strong financial metrics, (iii) Alliance (TP: RM3.85) for its recent price weakness and cash dividend yield of 6-7%.

Source: Hong Leong Investment Bank Research - 1 Aug 2022