Dec 2021 system loan closed at 4.5% with YoY growth (+0.5% MoM) which is within our 4.5-5.0% expectations. This was thanks to unyielding economic recovery towards the year-end which also translated to overall higher loan disbursement, approvals and repayments. Book quality progressively improved with gross impaired loans (GIL) coming in at 1.44% (-3bps MoM) as cashflow and income uncertainties subsided. On the flipside, a YoY deposits growth of 7.0% broke our 5% target for the year as cash liquidity remained preferred. That said, CASA-to-deposit ratio normalised at 30.1% (-43 bps MoM) from Nov 2021 all-time high. Looking forward, we project a loans and deposits growth of 5.0- 5.5% in CY22, slightly behind our in-house GDP projection of 5.5-6.0% with a focus on two OPR hikes possibly in 2HCY22. Overall, we maintain NEUTRAL on the sector. While banks are an almost immediate beneficiary of economic recovery, overall sentiment appears soft in the near term as macro factors could still trigger uncertainty. On that note, we advocate selective positioning with our top picks such as: (i) ABMB (OP; TP: RM3.65) which has fundamentals comparable to its larger cap peers; and (ii) RHBBANK (OP; TP: RM6.50) which may see a sentiment boost from its participation in the ongoing digital banking bid.

Strong close in Dec 2021.YoY, system loans improved by 4.5% as it was lifted by both household (+4.3%) and business (+4.9%) loan accounts. We saw the year end with a strengthened economic landscape, benefiting from the lifting of movement controls within the second half of the year. Household loans were likely lifted by greater transactions in the secondary market while business loans were fueled by higher working capital needs to make up for lag during the prior months. On a MoM basis, household loans and business loans increased by 0.7% and 0.2%, respectively. Concurrently, total disbursements surged (+25% YoY, 14% MoM) alongside industry-wide loan repayments (+23% YoY, +19% MoM) (refer to Table 1-3 for breakdown of system loans). Looking towards CY22, we believe an annual loans growth of 5.0%-5.5% is plausible given the current momentum demonstrated by ongoing economic activity. This is also closely in line with our in-house GDP forecast of 2022 of 5.5%-6.0%.

Loans application was solid (+28% YoY), but eased at the end (-1% MoM). Both household and business loan applications were rejuvenated by the greater need of cash, with the former likely capitalising the present low interest rate environment. However, this has fallen off in Dec 2021 as compared to Nov 2021 as there were pent up applications seen in the prior month, although business loans continued to be supportive (refer to Table 4-5 for breakdown of system loan applications).

Quality of loans continued to improve. Dec 2021 total impaired loans saw further improvement (-2% MoM) supported by the same abovementioned healthier economic environment. This translated to a GIL ratio of 1.44% (-3bps MoM) as more commitments were fulfilled. That said, this is mostly arising from household accounts as businesses saw a slight bump albeit at a much better state than the months before. Meanwhile, industry loan loss coverage is still buoyant at 129% (Nov 2021: 127%, Dec 2020: 108%) as banks remain prudent, also given ongoing moratorium applications (refer to Table 6-7 for breakdown of system impaired loans).

Cash is still preferred. As of Dec 2021, total deposits stayed elevated (+7.0% YoY, +1.1% MoM) which is above our earlier 5% YoY expectations in which we thought we could experience heavy withdrawals during the year-end period. That said, CASA-to-deposit ratio normalised from the all-time high in Nov 2021 to 30.1% (-43bps MoM). Unless we see a more aggressive-than-expected economic recovery, we believe it is possible consumers will lean towards cash liquidity to shelter against uncertainties. With that, our CY22 deposits growth target is in line with our loans prediction at 5.0%-5.5%. Industry LDR is reflective of the higher deposits trajectory as compared to loans, coming in at 88.5% in Dec 2021 (Nov 2021: 88.0%; Dec 2020: 87.6%). Meanwhile, banks continued to accumulate CET-1 (Dec 2021: 14.62%, +14 bps MoM) in anticipation of dividend payments from the December earnings quarter.

Maintain NEUTRAL on the banking sector. Banks will be one of the key beneficiaries of our national economic recovery, as reflected by our industry growth targets above. However, sentiment may still be soft as larger macro uncertainties still persist. Further, the one-off implementation of 2022’s prosperity tax is a dent to the overall earnings growth and dividend rewards to investors for the immediate year. Our top picks for the quarter are selective, being: (i) ABMB (OP; TP: RM3.65) for its higher SME composition and solid fundamentals relative to larger sized peers; and (ii) RHBBANK (OP; TP: RM6.50) as the sole bank competing for a digital banking license, which could translate to a strong sentiment boost should it win the award.

Source: Kenanga Research - 3 Feb 2022