Feb 2022 system loans growth clocked in at +4.7% YoY (+0.2% MoM) which is within our 5.0-5.5% industry growth target for now, counting on more exponential growth when economic recoverygains traction. The month did see some sequential declines from Jan 2022 in terms of disbursements, repayments and applications, but this could be due to the overall shorter business month in addition to the Chinese New Year (CNY)celebrations at the startof the year. Gross impaired loans (GIL) saw further normalisation at 1.53% (+8 bps MoM) likely prevailing from the lapse of the PEMULIH moratorium. On the flipside, deposits continued to expand (+7.2% YoY, +1.2% MoM) but we expect this to taper off slightly in the 2HCY22 period. We maintain our OVERWEIGHT call on the sector.With the release of our 2QCY22 Strategyreport, we promote RHBBANK (OP; TP: RM6.95) and HLBANK (OP; TP: RM22.70) as our Top Picks. We like these names amidst our six Outperform calls on the back of additional value propositions which we find to be compelling considerations in the current investing climate, being RHBBANK’s high floating rate loan mix to benefit from an interest rate hikeand HLBANK’s GIL being the most improved amongst the banks, providing solid asset quality buffers againstunfortunate shifts in the industry.

Keeping pace but hampered by a shorter month. In Feb 2022, system loans registered a 4.7% increase YoY with both household and business trailing in parallels. This was only a 0.2% MoM increase from Jan 2022 but one may argue that it is due to the shorter month in Feb 2022 as well as consumers and businesses lending forward in anticipation of the CNY festivities. This is also supported by disbursements and repayments falling off by 17% and 12% MoM (but +12% and +10% YoY in line with overall higher system loans).(Refer to Table 1-3 for breakdown of system loans).ForCY22, we believe an annual loans growth of 5.0-5.5% is plausible given the current momentum demonstrated by ongoing economic activity. This is in line with our in-house 2022 GDP forecast of 5.0-5.5%.

Similar tractions are seen with loans applications(+12% YoY,-10% MoM).While we could apply the similar reasons above to explain the monthly movements in loan application, there were more business loan applications (+6% MoM) against the decreasing household loans (-18% MoM). Business application growth appears to be arising from more working capital needs as companies tap onto the ongoing economicrecovery(refer to Table 4-5 for breakdown of system loan applications).

Some bumps in asset quality.Feb2022 total impaired loanswas flattish YoY butitinchedup 6% MoM on both household (+2%) and business (+9%) accounts. Correspondingly, GIL came in at 1.53% (Jan 22: 1.45%, Feb 21: 1.59%) likely due to the lapse of PEMULIH’s moratorium. URUS applications would have also closed in Jan 2022 but this is not expected to account for a large share of troubled accounts. Still, we had reckoned that such normalisation will occur at least for a few more months (pre-Covid-19 levels range at 1.60%). On the other hand, industry loan loss coverage eased slightly to 123% (Jan2022: 126%, Feb2021: 108%) as some banks could have been writing back certain excess provisions(refer to Table 6-7 for breakdown of system impaired loans).

Lofty CASA remains.As of Feb 2022, total deposits continued to grow (+7.2% YoY, +1.2% MoM) as liquidity remains preferred amidst ongoing uncertainties. That said, the monthly CASA mix did easedslightly at 30.4% (Jan 2022: 30.5%, Feb 2021: 30.1%) as we saw some shareportion leaning towards foreign currency accounts. For the time being, we keep our CY22 deposits growth target in line with our loans prediction at 5.0- 5.5%.In line with the current trajectory, LDR registereda sequential increase (Feb2022: 89.1% vs.Jan2022:88.9%;Feb2021: 87.8%).During the month, banks’ CET-1 came off to 14.8% (Jan 2022: 15.04%) in allocation for dividends.

Maintain OVERWEIGHT on the Banking Sector.We believe the ongoing macro factors will present more tailwinds than headwinds for the banking sector. It appears that Malaysia are mostly unaffected by the Russia-Ukraine conflict as neither countries are a meaningful trade partner, albeit it weighing down global investor sentiment. Unless we experience another unprecedented worsening of the Covid-19 situation, we anticipate the ensuing economic recovery would fuel loans growth as well as uplift asset quality as income streams become more sustainable. Write-backs from pre-emptive impairment provisions and management economic overlays could be an eventuality but at the meantime, banks are likely to see CY22 earnings smacked down by the one-off prosperity tax. Concurrentwith this report, wereleaseour2QCY22 Banking Strategy report where we introduce a sector-wide valuation rerating in conjunction with better sentiment on expectations on OPR hikes in 2HCY22. We also promote RHBBANK (OP; TP: RM6.95) and HLBANK (OP; TP: RM22.70) as our Top Picks for 2QCY22.We currently havesixOutperform calls,three Market Perform calls and  one Underperform call (refer to the Banking-220401-2Q22 Strategy report for further details).

Source: Kenanga Research - 1 Apr 2022