Loans growth held steady at 6.5% YoY while deposits grew quicker at 8.3% YoY due to a low base effect. Besides, asset quality was resilient. However, we saw leading indicators moderated. For NIM, it is seen to be hurt by: (i) FD repricing, (ii) CASA being consumed and substituted to FD, along with (iii) price rivalry for FD. Overall, we turn less bullish on the sector as we see tailwinds dissipating. Also, investment fatigue for banks is building up, considering that BUY merits employed for the past 1-2 years are becoming stale. Downgrade to NEUTRAL; we now only have two BUY calls under our coverage, namely RHB and BIMB.

Oct-22’s loans growth held steady at 6.5% YoY (Sep: +6.4%), fuelled by both the household (HH) and business (Biz) segments, which were up 6.3% (Sep: +6.6%) and 5.5% (Sep: +5.2%) respectively. In HH, the increase was broad-based across all sub segments. As for Biz, it was backed by working capital lending. Overall, system loans growth was within our full-year FY22 expectations of +6.0-6.5%.

Leading indicators softened further, seeing that loan applications slowed to 12.8% YoY (Sep: +34.1%); this was caused by both the HH (-6.9% vs Sep: +21.1%) and Biz (+49.9% vs Sep: +53.1%) segments. On a similar note, loans approval moderated to 17.5% (Sep: +37.7%) due to less accommodative lending to both HH (+2.7% vs Sep: +35.7%) and Biz (+33.4% vs Sep: +39.2%).

Deposits growth artificially speed up to 8.3% YoY (Sep: +7.4%) due to a low base effect (primarily from CASA and foreign currency deposits). Overall, Oct-22’s loan-to deposit ratio was unchanged MoM at 86% (vs Feb-18’s peak of 89%). We understand fixed deposit (FD) competition has been intense.

Asset quality was resilient, with Oct-22’s gross impaired loans (GIL) ratio remaining firm MoM at 1.82%; there was a 1bp uptick for HH while Biz fallen 2bp. Going forward, we expect GIL ratio to creep up but would not be overly concerned since banks have already made heavy pre-emptive provisions in FY20-21 to cushion for this. 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 broadened. The average lending rate spiked up 25bp MoM while the 3-mth board FD rate was down 1bp. In turn, interest spread widened 26bp. However, we see net interest margin (NIM) expansion narrowing given: (i) bulk of the FD usually will be repriced 6-9 months from the first OPR hike (kick-started in May-22), (ii) CASA being consumed and substituted to FD, along with (iii) price competition for FD.

Downgrade to NEUTRAL. Although valuations remained undemanding, we turn less bullish on the banking sector as we see sector tailwinds dissipating (there are lesser rate hikes next year, deposit rivalry is intense, and macroeconomic outlook is softer). Also, investment fatigue is building up towards the sector, considering that BUY merits employed for the past 1-2 years are becoming stale. Moreover, KLFIN performance is not trending any higher and has been range-bound. Currently, we only have two BUY ratings under our coverage, namely RHB (TP: RM6.60) and BIMB (TP: RM3.00). The former is favoured for its elevated CET1 ratio and attractive price-tag while we like the latter for its laggard share price showing.

Source: Hong Leong Investment Bank Research - 2 Dec 2022