May 2022 system loans rose by 5.0% YoY (+0.3% MoM), in line with our 5.0-5.5% CY22 industry growth target. The25 bps hike in OPR likely did a numberonthe industry, as household and business loans saw lower sequential growth with applications coming off in the double-digits. Lumpy applications pre-Hari Raya could also be a dampener to the month. Going forward,we anticipate slower household numbers but expect total industry growth to be lifted by a higher business portfolio as border reopening and a more vibrant economic environment could fuel working capital and expansionary needs. Gross impaired loans (GIL) returned to 1.64% (+7 bps) but we are unconcerned as it is an indication ofnormalisation of loans profile from the lapse of repayment assistance programs. Deposits continued to grow (+6.6% YoY, +0.2% MoM) but saw a decline in CASA-mix, possibly from some migration to term-deposits post-rate hike. We anticipate three additional 25 bps hikes (in July, September and November BNM meetings) as tighter monetary policies may be needed to curb inflationary pressures. We maintain our OVERWEIGHT call on the sector and lean towards high dividend stocks for shelter amidst recession-pulledsentiment. MAYBANK (OP; TP: RM11.05) is our favourite pick as the dividend champion (7-8%) while AFFIN (OP; TP: RM2.40) is noteworthy for its strengthening fundamentals and possible specialdividendpayments from the upcoming disposal of its asset management and insurance units.

Balanced increments. In May 2022, system loans derived a 5.0% YoY growth from better household (+5.0%) and business (+4.9%) loans. MoM, we saw a 0.3% expansion. Growth in household loanseased, as expected, as property purchases decisions were likely impeded by the OPR hike announced during the month. The same likely impacted the growth on new business loans but would likely pick up as higher working capital upkeep resurface post-Hari Raya celebration. Also due to the said festivities, disbursement and repayments tapered off by 11% and 10% on a MoM basis (refer to Table 1-3 for breakdown of system loans). For now, we continue to maintain our CY22 annual loans growth of 5.0- 5.5% on better economic trajectory in 2HCY22 with the reopening of borders likely to boost previously troubled sectors (i.e. air travel, hospitality).

New applications affected by higher rates (+5% YoY, -10% MoM). May 2022 total applications did mark an annual improvement but showed significant cooling off on a monthly basis as households (-6%) and businesses (-16%) were likely revaluating their borrowing decisions post the OPR hike. We may continue to see fewer new applicants for the households, particularly as prospective home buyers may have already entered at lower rates but could see a rebound in business loans due to the same abovementioned reason. (refer to Table 4-5 for breakdown of system loan applications).

Impairments now at normalised levels. Total impaired loans for May 2022 (+8% YoY, +5% MoM) brought industry GIL ratio to 1.64% (Apr 2022: 1.57%, May 2021: 1.59%). Pre-Covid, GIL ranged 1.60-1.80%. Hence, we deem this to be within the “normal rate” as past repayment assistance programs delayed and distorted the timing of defaults for at-risk accounts. Industry loan loss coverage continued to moderate at 109.1% (Apr 2022: 113.4%, May 2021: 109.9%) as provisioning needs loosening, albeit not at a large scale as writeback considerations are still sidelined (refer to Table 6-7 for breakdown of system impaired loans).

CASA backing down. While deposits continued to display strength (+6.6% YoY, +0.2% MoM), CASA-to-deposit mix slipped to 30.8% (Apr 2022: 31.3%, May 2021: 30.4%) as term-deposits gained slightly more favour as deposit rates are adjusted up with a higher OPR. That said, we do not anticipate a wide-scale migration at current interest levels as depositors may likely wait until more attractive rates are present. We keep our CY22 deposits growth target in line with our loans prediction at 5.0-5.5%for now.LDR remained steady at 90.2% (Apr 2022: 90.0%, May 2021: 87.7%).

Maintain OVERWEIGHT on the Banking Sector. While there might be some short-term adversity with the expected rise in interest rates, we believe the need for business loans to fuel economic growth could mitigate the impact to household affordability. Additionally, our expectations for a greater OPR in CY22 (three +25 bps hikes) would be earnings accretive for the banking space. That said, recessionary concerns have bogged sentiment, reflected in recent share price deterioration. Hence, we favour banking stocks that can offer higher dividend safety as a hedge against possible capital downside. Our large cap top pick is MAYBANK (OP; TP: RM11.05)which we highlight for stellar dividend returns (7-8%) paired by its commendable asset quality readings (GIL: <1.9%, below listed peers’ average of 2.0%) in spite of being the leader in loans and deposits share. For the smaller cap banks, we believe AFFIN (OP; TP: RM2.40) presents opportunities with the return in earnings growth prospects thanks to its AIM22 initiatives. With the disposal of AHAM and AXA Affin to be completedin 3QCY22, we do not discount special payouts which could bump up an already decent expected yield of 5-6%.

Source: Kenanga Research - 1 Jul 2022