System loans growth lost traction to 4.9% YoY while deposits gathered steam to 7.0% YoY. Also, leading indicators remained weak but asset quality was steady. As for NIM, it is seen to be hurt by: (i) FD repricing, (ii) CASA being consumed and substituted to FD, along with (iii) lesser OPR hikes this year. That said, the overall sector’s risk-reward profile is balanced, in our view, given dissipating tailwinds are soothed by inexpensive valuations. Retain NEUTRAL. BUY ratings include: RHB, AMMB, Alliance, and BIMB.

Jan-23’s loans growth lost traction to 4.9% YoY (Dec: +5.7%), no thanks to weaker Business (Biz) segment, which grew by only 2.0% (Dec: +3.4%) while household (HH) remained steady at 5.6% (Dec: +5.9%). In Biz, softer working capital financing growth was a drag. For HH, the increase was broad-based across all sub-segments. Overall, system loans growth was close to our full-year FY23 estimates of 5.0-5.5%.

Leading indicators remained weak, seeing that loan applications contracted 13.2% YoY (Dec: -16.0%); both HH (-18.8% vs Dec: -19.1%) and Biz (-2.4% vs Dec: -10.5%) segments saw lethargic demand. Similarly, loans approval fell 6.1% (Dec: -15.9%) as stringent lending to both HH (-12.1% vs Dec: -15.9%) and Biz (+2.7% vs Dec: -15.9%) persisted.

Deposits growth gained traction to 7.0% YoY (Dec: +5.9%) given quicker increases at foreign currency and ‘other’ deposits. Overall, Jan-23’s loan-to-deposit ratio stayed relatively flattish MoM at 86% (vs Feb-18’s peak of 89%). That said, the competition for fixed deposit (FD) has abated a little.

Asset quality was steady, with Jan-23’s gross impaired loans (GIL) ratio just ticking up 1 bp MoM to 1.73%; the 4bp rise in Biz was slightly offset by HH, which fallen 1bp. Going forward, we expect GIL ratio to creep up but would not be overly worried since banks are better equipped vs prior slumps; the large pre-emptive provisions built up in FY20-21 and some FY22 quarters to combat Covid-19 pandemic woes and latency in credit loss from OPR increases, act as robust buffer to cushion for any asset quality weakness in the short-term

Interest spread broadened. The average lending rate inched up 4bp MoM while the 3-month board FD rate narrowed 5bp. In turn, interest spread widened 9bp. However, we see net interest margin (NIM) shrinking given: (i) repricing of matured deposits, (ii) CASA being utilized and substituted to FD, along with (iii) lesser OPR hikes this year.

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 10 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. Regardless, we have four BUY calls under our coverage, namely: (i) RHB (TP: RM6.60), (ii) AMMB (TP: RM4.35), (iii) Alliance (TP: RM4.15), and (iv) BIMB (TP: RM3.00). The quartet share a common trait of inexpensive valuations and recent price weakness turned their risk-reward profile to become more favourable than the other banks we follow.

Source: Hong Leong Investment Bank Research - 1 Mar 2023