Both system loans and deposits growth lost momentum to 5.5% and 5.9% YoY respectively. Also, leading indicators weakened further. However, asset quality remained resilient. As for NIM, it is seen to be hurt by: (i) FD repricing, (ii) CASA being consumed and substituted to FD, along with (iii) price competition for FD. That said, the overall sector’s risk-reward profile is balanced, in our view, given dissipating tailwinds are soothed by inexpensive valuations. Retain NEUTRAL; the two BUY calls we have are RHB and BIMB.

Nov-22’s loans growth lost momentum to 5.5% YoY (Oct: +6.5%), as the Business (Biz) segment slowed to 3.4% (Oct: +5.2%) given lumpy large corporate repayments. That said, household (HH) loans expansion remained resilient at 6.0% (Oct: +6.3%), backed by home, auto, and credit card lending. Overall, system loans growth missed our +6.0-6.5% full-year FY22 expectations; as such, we revised it down to +5.5-6.0%. We see FY23 loans to increase at a softer clip of +5.0-5.5% on the back of a potential monetary policy-induced economic slowdown.

Leading indicators weakened further, seeing that loan applications contracted 9.8% YoY (Oct: +12.6%); this was dragged by both the HH (-18.4% vs Oct: -7.0%) and Biz (+4.0% vs Oct: +49.4%) segments. Similarly, loans approval slowed to +19.9% (Oct: +24.8%) due to stricter lending to HH (-13.0% vs Oct: +2.8%) while Biz chugged along (+70.7% vs Oct: +48.4%).

Deposits growth slowed to 5.9% YoY (Oct: +8.3%), no thanks to moderating CASA, foreign currency, and ‘other’ deposits. Overall, Nov-22’s loan-to-deposit ratio was flat MoM at 86% (vs Feb-18’s peak of 89%). That said, we understand the current rivalry for fixed deposit (FD) remains intense.

Asset quality was resilient, with Nov-22’s gross impaired loans (GIL) ratio ticking up only 1bp MoM to 1.83%; we note HH stayed flat but Biz increased 3bp. 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 FY20-22 to cushion for this. Moreover, FY22-24 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 rose 12bp MoM while the 3-mth board FD rate increased 26bp. In turn, interest spread compressed 14bp. Likewise, 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.

Maintain NEUTRAL. All considered, we opine that the banking sector has a balanced risk-reward profile. We expect KLFIN to trade largely sideways in 1H23 since appetite for the sector has diminished on waning outlook. That said, consolation comes in the form of undemanding sector valuations and decent dividend yield of 5%, which would provide downside support to share prices. Now, we only have two BUY ratings under our coverage, namely RHB (TP: RM6.60) and BIMB (TP: RM3.00). The former is liked for its elevated CET1 ratio and attractive price-point while the latter is favoured for its laggard share price showing and bright structural long-term growth prospects.

Source: Hong Leong Investment Bank Research - 3 Jan 2023