Loans growth gained traction to 5.9% YoY while deposits slowed to 6.2% YoY. That said, leading indicators stayed strong but asset quality weakened. As for NIM, we expect it to broaden from OPR hikes but the magnitude may be capped by the downward normalization of CASA mix. Nonetheless, banks are still net beneficiaries of interest rate upcycle. Overall, we continue to view positively the banking sector and also, opine the risk-reward profile is skewed to the upside; the cocktail of robust profit growth and undemanding valuations will be impetus to drive performance. Retain OVERWEIGHT; BUY calls include: Maybank, RHB, BIMB, Affin, Alliance.

Jul-22’s loans expansion quickened to 5.9% YoY (Jun: +5.6%), fuelled by both the household (HH) and business (Biz) segments, which were up 6.1% (Jun: +5.9%) and 5.8% (Jun: +5.8%) respectively. In HH, the jump came from mortgage, auto financing, and credit card. As for Biz, it was backed by working capital loans. Overall, the system loans growth beat our +5.0-5.5% full-year FY22 estimates; as such, we revise it up to +5.5-6.0% given strong economic recovery.

Leading indicators remained strong, as loan applications jumped 79.8% YoY (Jun: +41.7%); this was backed by both the HH (+72.8% vs Jun: +48.1%) and Biz (+87.9% vs Jun: +32.5%) segments. Similarly, loans approval followed suit and rose by 77.1% (Jun: +53.0%) given accommodative financing to both HH (+120.0% vs Jun: +55.4%) and Biz (+48.6% vs Jun: +50.1%).

Deposits growth slowed to 6.2% YoY (Jun: +6.6%), as CASA and foreign currency deposits lost traction. Overall, Jul-22’s loan-to-deposit ratio remained flat MoM at 87% (vs Feb-18’s peak of 89%). We understand that the current deposit taking landscape is still fairly benign.

Asset quality weakened, considering Jul-22’s gross impaired loans (GIL) ratio ticked up 6bp MoM to 1.85%; both HH and Biz displayed a rise of 4bp and 8bp respectively. We see GIL ratio to further increase 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 30bp MoM while the 3- mth board FD rate increased by 22bp. In turn, interest spread expanded 8bp. Also, we expect net interest margin (NIM) to expand from OPR hikes but the magnitude could be capped by downward normalization of CASA mix. Nonetheless, 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: RM6.60) 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: RM3.00) 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: RM4.05) for its cash dividend yield of 6-7% and large management provision overlay buffer.

Source: Hong Leong Investment Bank Research - 1 Sept 2022