Nov 2021 system loan rose by 4.3% YoY with a MoM increase of 0.9%on the back of better economic strength.This beats our initial 3-4% CY21 expectations which we now believe is more likely to close at 4.5-5.0%. The higher loan demand also pushed for greater applications, disbursements and approvals, although there was some normalisation in repayments from a lumpier prior month. Gross impaired loans (GIL) also eased to 1.47% (-5bps MoM) as asset quality improved in line with the more sustainable economic landscape. In terms of deposits, a YoY growth of 6.8% also exceeded our earlier expectations of 3-4%. A closing of ~ 5% could be more realistic as we do anticipate some level of withdrawals to fuel year-end spending. Meanwhile, CASA-to-deposit mix reported another new high at 30.53%. In spite of near-term recovery prospects, sentiment in the banking space continues to be soft which could stem from uncertainties surrounding new Covid-19 variants. Meanwhile, NIMs could also see some pressure as competition for deposits heighten; possibly further fuelled by the entry of digital banks in 1QCY22 and a possible OPR hike in 2HCY22. On that note,we maintain our NEUTRAL call on the sector with selective recommendations, being: (i) RHBBANK (OP; TP: RM6.50) which is the sole listed conventional participant for a digital banking license coupled with leading dividend returns (~6%) and CET-1 (~16%) for sizeable capital buffers; and (ii) ABMB (OP; TP: RM3.25) which could be a strong proxy to the materialisation of economic recovery of its high SME loan mix with ROE (9%) and dividend yields (~5%) comparable to its larger cap peers.

Solid Nov 2021 growth. YoY, system loans improved by 4.3% from strength in both household (+4.1%) and business (+4.7%) loan accounts. A more stable economic environment instilled greater confidence in taking on debt to increase spending, having been suppressed by economic and movement restrictions for the most part of the past two years. On a MoM basis, household loans and business loans increased by 0.8% and 1.0%, respectively. This is also reflected in heavier loan disbursements (+31.3% YoY, +2.1% MoM). On the flipside, loan repayments saw a 1.5% MoM decline, but we suspect this could be due to business accounts making chunky repayments in the prior month when cash-flows improved (refer to Table 1-3 for breakdown of system loans). Given the current trajectory, we believe our CY21 system loans expectations is too conservative as a 4% YoY improvement comesDecember 2021 equates to a mere 0.05% MoM growth. To this end, a closing target of 4.5-5.0% is more plausible. This coincides with the surge in loan applications (+21% YoY, +16% MoM), fuelled by business accounts (+28% MoM) seeking freshcash injection to capitalise on the economic rebound. Household loans (+9%) are not shying away too as prospective property owners try to make the most of low interest rates before a possible rate hike in 2HCY22 (refer to Table 4-5 for breakdown of system loan applications).

Healthier books seen. Nov 2021 total impairment continued to narrow (-2% MoM) from the same above mentioned healthier economic environment. GIL ratio dipped to 1.47% (-5bps MoM) as previously troubled accounts progressively rehabilitate. The new URUS program could possibly delay the worsening, but the exposure could be small given the comparative proportion of B50 accounts (20-30% of retail) amongst the banks. Meanwhile, industry loan loss coverage remains lofty at 126.7% (Oct 2021: 124.3%, Nov 2020: 107.4%) as banks continued to take cautionary measures as Covid-19 uncertainties persist (refer to Table 6-7 for breakdown of system impaired loans).

Deposits still rising. As of Nov 2021, total deposits continued to demonstrate strength (+6.8% YoY, +1.7% MoM) with is also above our expectations. CASA-to-deposit ratio also reached a new high at 30.53% (+23bps), although we anticipate some tapering off coinciding with increased year-end spending. That said, our 3-4% YoY CY21 target may be too conservative as it would require a 1.3% MoM decline, which may be too aggressive. We believe a closing range of close to 5% growth (similar to deposits growth) may be more realistic. Industry LDR remains relatively favourable for the banks at 88.0% (Oct 2021: 87.2%, Nov 2020: 88.3%) with cost of funds expected to remain relatively manageable for now. Industry CET-1 ratio grew slightly to 14.48% (+6 bps) as banks build reserves for upcoming dividend payments.

Maintain NEUTRAL on the banking sector. The banking sector appears to be at the forefront of our national economic recovery. CY22 is expected to see the same momentum lest we experience further unforeseen tightening of movement controls arising from a worsening Covid-19 situation. We believe this lingering uncertainty is the factor keeping valuations soft for the sector at the moment. Additionally, possible NIM compression could offset loans growth prospects with an anticipated OPR hike likely to dampen it further. With that, we advocate selective positioning within the sector with our Top Picks being: (i) RHBBANK (OP; TP: RM6.50) and; (ii) ABMB (OP; TP:RM3.25). RHBBANK bank is the sole listed conventional bank with a bid for a digital banking license with respectable dividends (~6% yield) while ABMB has the highest SME proportion amongst its banking peers, making it one of the strongest proxies for an economic recovery play. Further, its expected ROE of 9% is comparable to its larger cap competitors.

Source: Kenanga Research - 3 Jan 2022