Loans and deposits growth gained traction to 6.8% and 7.5% YoY respectively. Also, leading indicators remained robust and asset quality held steady. 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.

Aug-22’s loans grew faster at 6.8% YoY (Jul: +5.9%), thanks to both the household (HH) and business (Biz) segments, which expanded 6.5% (Jul: +6.1%) and 6.7% (Jul: +5.9%) respectively. In HH, the increase was broad-based while for Biz, it was fuelled primarily by working capital loans. Overall, system loans growth again beat our +5.5- 6.0% full-year FY22 expectation; accordingly, we revise it up to 6.0-6.5% given strong economic recovery.

Leading indicators remained robust, as loan applications jumped 51.7% YoY (Jul: +79.4%); this was backed by both the HH (+81.0% vs Jul: +72.8%) and Biz (+25.7% vs Jul: +87.1%) segments. Similarly, loans approval followed suit and rose by 81.4% (Jul: +77.7%) given accommodative financing to both HH (+113.8% vs Jul: +119.8%) and Biz (+63.1% vs Jul: +49.8%).

Deposits growth gained traction to 7.5% YoY (Jul: +6.2%), on the back of stronger fixed, foreign currency, and ‘other’ deposits. Overall, the Aug-22’s loan-to-deposit ratio remained broadly stable MoM at 87% (vs Feb-18’s peak of 89%). We understand that the current deposit taking landscape is still fairly benign.

Asset quality held steady, with Aug-22’s gross impaired loans (GIL) ratio sliding 1bp MoM down to 1.84%; this was aided by the 4bp drop at HH but was offset by the 3bp increase in Biz. Going forward, we expect GIL ratio to climb but would not be overly worried since banks have made heavy pre-emptive provisions in FY20-21 to cushion for this. Furthermore, 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 15bp MoM while the 3- mth board FD rate increased by 1bp. In turn, interest spread expanded 14bp. 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 driving 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 - 3 Oct 2022