Jan 2022 system loan started the year with a 4.7% YoY growth (+0.5% MoM) which is within our 5.0- 5.5% industry growth expectations for now. However, possibly due to lumpier activities in Dec 2021, there were some minor setbacks in application, disbursement and repayment numbers. Also, possibly due to the lapse of the PEMULIH moratorium, gross impaired loans (GIL) crept up slightly (1.45%, +1bps MoM) while total deposits experienced a sequential decline (-0.6% MoM), likely from withdrawals ahead of Chinese New Year festivities. Nonetheless, deposits still grew handsomely at 6.5% YoY but this could ease in the later part of the year. Post 4QCY21 results season, we take this opportunity to upgrade the sector to OVERWEIGHT from NEUTRAL on the back of clear tailwinds towards wider earnings expansion (i.e. economy-fuelled growth, lower asset quality risks, recovering trading activities, larger fee-based income), barring another unforeseen lockdown. For now, we still prefer: (i) ABMB (OP; TP: RM3.85) which has fundamentals comparable to its larger cap peers; and (ii) RHBBANK (OP; TP: RM6.70) which may see a sentiment boost from its participation in the ongoing digital banking bid. That said, AFFIN (OP; TP: RM2.10) is now at the forefront as a strong dividend contender while we opine AMBANK (OP; TP: RM3.75) could return to pre-global settlement levels.

Off to a good start. In Jan 2022, system loans reflected a 4.7% increase YoY with better numbers in both the household (+4.7%) and business (+4.6%) fronts. Compared to Dec 2021, we see a 0.6% and 0.5% MoM growth, respectively, with the main drivers of household loans from more housing loans (possibly for secondary market housing) and hire purchases. Meanwhile, business loans were funnelled towards more working capital needs, likely to cope with the reinvigorating economic landscape. YoY, total disbursements (+22%) and repayments (+19%) surged but saw a MoM decline (-7%) due to a higher base in Dec 2021 to meet year-end needs.(Refer to Table 1-3 for breakdown of system loans). For 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 2022 GDP forecast of 5.5%-6.0%.

Loans applications are on the rise (+10% YoY) but are tapering off (-19% MoM). Similar to the above, this could be due to applicants attempting to complete their applications during the year-end which resulted in a higher base in Dec 2021.The MoM decline in loan application appears to affect all activities except for the purchase of securities, as lenders look to capitalise on better trading markets (refer to Table 4-5 for breakdown of system loan applications).

Loans quality could be normalising. Jan 2022 total impaired loans narrowed by 6% YoY but saw its first MoM reversion since Jul 2021 with a 1% uptick in both household and business loans which translated to a higher GIL of 1.45% (Dec 2021: 1.44%). This is likely due to the lapse of the PEMULIH moratorium in Dec 2021. According to the channel checks, only a small percentile of B50 customers took up the URUS program for further deferment due to its stricter criteria and credit scoring implications for undertaking it. Without the presence of any active moratoriums, we may see GIL levels normalising in the coming months. Meanwhile, industry loan loss coverage continued to rise, at 132% (Dec 2021: 129%, Jan 2020: 108%) as banks remained relentless with their safety buffers (refer to Table 6-7 for breakdown of system impaired loans).

CASA ratios are once again peakish. As of Jan 2022, total deposits remained high (+6.5% YoY,-0.6% MoM) with CASA-to-deposit mix trailing close to the industry high of 30.5%. The monthly decline could be the result of withdrawals ahead of CNY festivities in 1st Feb 2022 but we anticipate customers to replenish their accounts subsequently. For the moment, we keep our CY22 deposits growth target is in line with our loans prediction at 5.0%-5.5%. In line with the current trajectory, LDR registered a sequential increase (Jan 2022: 88.9% vs Dec 2021: 88.5%; Jan 2021: 88.2%). Meanwhile, banks are accumulating their CET-1 (Jan 2022: 15.04%, +42bps) in preparation of dividend payments from the December earnings quarter.

Upgrade the banking sector to OVERWEIGHT from NEUTRAL. The recent 4QCY21 results season mostly demonstrated positive tidings ahead for the banks, where we saw 4 overperformers with 3 disappointments. Nonetheless, the entry in early 2022 prompted us to relook at the sector closer towards its prospect in 2023, where if the economy continues to recover without disruption, demand for loans could be exponential and its growth may mitigate any NIM erosion from the ongoing competition of deposits. Most banks anticipate at least one OPR hike in 2HCY22 and this should translate to slight bump to annualised NIMs thereafter. We anticipate NOII to stabilise from the industry-wide decline in CY21 as we operate in a more normalised trading and investing landscape. Meanwhile, the growth in fee-based income will help to build a more sustainable base for the banks. Finally, earnings surprises may be seen when the banks eventually write back their provisions and overlays. Dividend payments are also mostly back to pre-Covid levels, indicating that soundness in capital management has recovered. Post results adjustments, we now have 5 outperform call in the sector. Besides our Top Picks of ABMB (OP; TP: RM3.85) and RHBBANK (OP; TP: RM6.70), we also have AFFIN (OP; TP: RM2.10), AMBANK (OP; TP: RM3.75) and MAYBANK (OP; TP: RM10.85).Our sole Underperformer is MBSB (TP: RM0.500).

Source: Kenanga Research - 2 Mar 2022