Apr 2022 system loans increased by 5.0% YoY (+0.4% MoM), in line with our 5.0-5.5% industry growth target for now. With the OPR hike coming in effect in May 2022, we believe this could play down into slower household applications, although businesses are expected to continue demanding for loans to capitalise on the ongoing economic recovery. Gross impaired loans (GIL) linger at what we deem to be a normalised level at 1.57% (+3bps MoM) following the lapse of repayment assistance programs. Deposit-wise, consumers continue to bank in more (+6.9% YoY, +0.3% MoM) and have once again loaded up CASA in bulk, possibly from effective promotions by the banks. With the OPR hike, we anticipate some degree of migration into fixed deposits albeit at a moderate level as effective interest yields are still left wanting from pre-Covid rates. 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: RM22.85). RHBBANK is a solid pick for its high capital reserves and recent digital banking win with Boost could be a medium-term sentiment booster as updates develop. Meanwhile, we like HLBANK as a safe haven pick given their exceptional improvements in GIL and containing asset quality.

Fuelled by property and working cap. In Apr 2022, system loans pointed a 5.0% YoY increase thanks to better household (+4.9%) and business (+5.1%) loans, which is a 0.4% MoM increment from Mar 2022. Demand for residential property persists as prospective buyers continued to take advantage of the low interest rate environment while also purchasing ahead of Hari Raya, although we reckon this would ease in May 2022 following the first OPR hike then. Apr 2022 disbursement was more muted (-1.2% MoM) while repayment (+2.1%) trends picked up. We believe the higher consumption is a telling indicator 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.

Loan applications easing (-1% YoY, -6% MoM). Apr 2022 applications came in at RM93.1b, which tapers from March 2022. Note however that Mar 2022 unloaded a bottleneck in loan applications where Feb 2022 was slower due to Chinese New Year festivities and a shorter working month. The 5% MoM decline in household loans could also be reflective of the depleting number of prospective home buyers. That said, a 7% MoM increase in business loan applications suggest that more enterprises are seeking to reap from a recovering economy (refer to Table 4-5 for breakdown of system loan applications).

Impairments are picking up. Total impaired loans for Apr 2022 rose (+5% YoY, +3% MoM) to arrive at a GIL ratio of 1.57% (Mar 2022: 1.54%, Apr 2021: 1.57%). We believe the current rate stands at a “normal”level as most participants of repayment assistance plans would have graduated from the program that deflated overall asset quality. Recall that pre-Covid GIL lingers at >1.60%. Meanwhile, industry loan loss coverage begins to moderate to 113% (Mar 2022: 115%, Apr 2021: 111%) as banks are progressively relaxing their provisioning needs (refer to Table 6-7 for breakdown of system impaired loans).

CASA back at it again. CASA-to-deposit ratio surged to another new high at 31.3% (Mar 2022: 30.3%, Apr 2021: 30.4%) after subsiding in the past few months. The rise in deposits (+6.9% YoY, +0.3% MoM) likely came as banks released more rate competitive deposit plans to acquire cheaper funds ahead of an OPR adjustment, unknowingly seeing it in the following month. While we anticipate some migration into non-CASA products, we do not think it will be significant as the market may now be affirmed of subsequent hikes to come. 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 90.0% (Mar 2022: 89.6%, Apr 2021: 87.7%).

Maintain OVERWEIGHT on the Banking Sector. We believe the ongoing macro factors will present more tailwinds than headwinds for the banking sector. In the recently completed 1QCY22 earnings season, we saw only 1 disappointment (MBSB) with 2 better-than-expected earnings (AMBANK, CIMB) with the rest performing as expected. Most corporates expressed confidence in seeing through 2022 strongly with little indication of possible hurt from the current commodity price surge and supply debacle, suggesting that it will likely be contained in the near term. Several corporates even proceeded to upgrade their guidances for their CY22 earnings. For now, 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 battered by the one-off prosperity tax. We also promote RHBBANK (OP; TP: RM6.95) and HLBANK (OP; TP: RM22.85) as our Top Picks for 2QCY22.

Source: Kenanga Research - 1 Jun 2022