Both system loans and deposits growth remained steady at 5.7% and 5.9% YoY respectively. However, leading indicators weakened but asset quality improved. 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 rivalry 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.

Dec-22’s loans growth held steady at 5.7% YoY (Nov: +5.5%), fuelled by both the household (HH) and Business (Biz) segments, which were up 5.9% (Nov: +6.0%) and 3.3% (Nov: +3.0%) 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 estimates of +5.5-6.0%. For FY23, we see loans rising at a softer clip of +5.0-5.5% on the back of a potential monetary policy-induced economic slowdown.

Leading indicators softened further, seeing that loan applications contracted 16.1% YoY (Nov: -10.1%); this was caused by both the HH (-19.1% vs Nov: -18.4%) and Biz (-10.9% vs Nov: +3.3%) segments. On a similar note, loans approval declined 16.0% (Nov: +20.3%), no thanks to stricter lending to both HH (-15.9% vs Nov: -12.9%) and Biz (-16.2% vs Nov: +71.4%).

Deposits growth was unchanged at 5.9% YoY (Nov: +5.9%) as CASA moderation was offset by quicker increases at FD, foreign currency, and ‘other’ deposits. Overall, Dec-22’s loan-to-deposit ratio remained flat MoM at 86% (vs Feb-18’s peak of 89%). That said, we understand the current rivalry for fixed deposit (FD) is still intense.

Asset quality improved, with Dec-22’s gross impaired loans (GIL) ratio inching down 11bp MoM to 1.72%; this was thanks largely to the steep 27bp decline at Biz while HH remained flat. 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. Also, FY23-24 NCC assumption used by both us and consensus are fairly elevated (above the normalized run-rate but below FY20-21’s level).

Interest spread broadened. The average lending rate spiked up 21bp MoM while the 3-month board FD rate rose at a slower pace of 5bp. In turn, interest spread widened 16bp. 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 rivalry for FD.

Maintain NEUTRAL. We continue to believe that the banking sector has a balanced risk-reward profile. Tailwinds which were supposed to be enjoyed by banks (like big NIM expansion, strong credit growth) over FY22-23 have instead been frontloaded to last year, turning the next 12 months to be less exciting. Furthermore, banks may now have to grapple with possibly steeper cost of funds, smaller NOII, and loans growth. However, undemanding sector valuations and decent dividend yield of 5% are solaces that would provide downside support to share prices. 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 high CET1 ratio and attractive price-point while the latter is adored for its laggard share price performance and bright structural long-term growth prospects.

Source: Hong Leong Investment Bank Research - 2 Feb 2023