Loans growth tapered to 6.4% YoY but deposits held firm at 7.4% YoY. However, we saw leading indicators moderated as well but asset quality remained 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 and deposit competition. Nonetheless, 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 profit growth and undemanding valuations will drive performance. Keep OVERWEIGHT; BUY calls include: Maybank, RHB, BIMB, Affin, Alliance.

Sep-22’s loans growth tapered to 6.4% YoY (Aug: +6.8%) due to a high base effect, observed at the business (Biz) segment (+5.2% vs Aug: +6.8%). That said, household (HH) lending growth stood firm at 6.6% (Aug: +6.6%), led by a broad-based increase across all sub-segments. Overall, system loans growth was within our full-year FY22 expectations of +6.0-6.5%.

Leading indicators moderated, given loan applications slowed to 34.1% YoY (Aug: +51.4%); this was caused by HH (+21.2% vs Aug: +80.9%) but Biz remained steady (+53.0% vs Aug: +25.3%). Similarly, loans approval followed suit and decelerated to 37.3% (Aug: +82.3%) due to more restrictive financing to both HH (+35.7% vs Aug: +114.0%) and Biz (+38.6% vs Aug: +64.3%).

Deposits growth held firm at 7.4% YoY (Aug: +7.5%), on the back of strong foreign currency and ‘other’ deposits, which helped to offset CASA attrition. Overall, Sep-22’s loan-to-deposit ratio nudged down 1ppt MoM to 86% (vs Feb-18’s peak of 89%). We understand competition for fixed deposits has been heating up.

Asset quality held steady, with Sep-22’s gross impaired loans (GIL) ratio sliding 2bp MoM down to 1.82%; this was aided by the 1bp and 3bp drop in HH and Biz segments respectively. Going forward, we expect GIL ratio to creep up 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 narrowed. The average lending rate spiked up 19bp MoM while the 3-mth board FD rate rose by 23bp. In turn, interest spread narrowed 4bp. However, we expect net interest margin (NIM) to widen from OPR hikes but the magnitude could be capped by downward normalization of CASA mix and deposit rivalry. 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 - 1 Nov 2022