Mar 2022 system loans gained 4.6% YoY (+0.6% MoM) which is in line with our 5.0-5.5% industry growth target for now, as we anticipate a propelled demand for loans from a compounding economic recovery going forward. Coming out of Feb 2022’s shorter seasonal month, disbursements, repayments and applications marked significant increments. Gross impaired loans(GIL) stayed at what we feel is a normalising level at 1.54% (+1 bps MoM)as repayment assistance programs marginalise. Meanwhile, deposits expanded further (+5.9% YoY, +0.5% MoM) albeit with CASA mix toning down as banks are likely introducing more sophisticated products to sustain a low cost of funds pre-OPR hike. We maintain our OVERWEIGHT call on the sector with our favourites for the 2QCY22 season being RHBBANK (OP; TP: RM6.95) and HLBANK (OP; TP: RM22.70). We had favoured RHBBANK to be a strong candidate for a digital banking license thanks to its partnership with Boost (refer to our concurrently released Digital Banking update report). Meanwhile, HLBANK could be a safe haven for those still wary of unfavourable macros and their impact to asset quality.

Steady flows. In Mar 2022, system loans noted a 4.6% YoY increase as both household (+4.9%) and business (4.1%) loans followed suit. This also translates to a 0.6% MoM growth from Feb 2022 which only saw marginal sequential increments owing to it being a shorter month with Chinese New Year season in tow. Mar 2022 disbursement and repayments also surged by 31% and 24% MoM, respectively, after tapering off in the prior month. Overall, these numbers suggest that economic recovery is still on track with greater possible surges in 2HCY22 when income levels rise (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 in line with our in-house 2022 GDP forecast of 5.0-5.5%.

Loans applications loading up (+5% YoY, +48% MoM). Mar 2022’s RM98.6b system loans applications marked the highest single month application in recent history, seconded by Mar 2021’s RM94.2b. The strong momentum was jolted in both household and business fronts, although households registered a 1% YoY decline, indicating that there may be an easing in the pool of prospective house buyers whereas business growth opportunities are still aplenty (refer to Table 4-5 for breakdown of system loan applications).

GIL stable albeit moderate. Total impaired loans for the month creeped up (+2% YoY, +2% MoM) which came to a GIL ratio of 1.54% (Feb 2022: 1.53%, Mar 2021: 1.58%). However, we do not see this as a cause of concern as industry numbers progressively corrects post moratorium. Repayment assistance programs helped cushion GIL to linger at <1.50% whereas pre-Covid levels have ranged at >1.60%. Meanwhile, industry loan loss coverage continued to ease to 116% (Feb 2022: 120%, Mar 2021: 111%) as some banks could have been writing back certain excess provisions (refer to Table 6-7 for breakdown of system impaired loans).

CASA easing out. As of Mar 2022, total deposits posted another increase (+5.9% YoY, +0.5% MoM) but reported a softening of CASA share to 30.3% (Feb 2022: 30.4%, Mar 2021: 30.1%) with a migration to unconventional deposit products. We reckon that as we approach 2HCY22 where an OPR hike is expected, banks are racing to acquire as much cheap funds as possible before interest costs increase. That said, we had anticipated CASA levels to come off, at least with regards to fuelling consumption and spending. For the time being, we keep our CY22 deposits growth target in line with our loans prediction at 5.0-5.5%. Thanks to the earlier mentioned system loans growth, LDR subsequently rose to 89.6% (Feb 2022: 89.1%, Mar 2021: 87.1%).

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 is 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. We also promote RHBBANK (OP; TP: RM6.95) and HLBANK (OP; TP: RM22.70) as our Top Picks for 2QCY22. Refer to our concurrently released Sector Update with regards to BNM’s recent award of the five digital banking licenses.

Source: Kenanga Research - 5 May 2022