July 2022 system loans grew by 5.9% YoY (+0.3% MoM), beating our expectations to whichwe raise ourCY22 industry growth target of 5.5-6.0%. Household loans continue to increase but we believe it could taper off slightly on higher interest rates in subsequent months. This is also indicative of the slowing applications here while business loans remain supported by increasing working capital requirements. GIL appears lofty (1.85%, +6 bps MoM) post repayment assistance programs but we believe levels are still manageable to the banks. Meanwhile, deposits growth could be fuelled by more attractivelong-term yielding products; hence, we maintain our 6.5-7.0% target. To recap, we anticipate two additional 25 bps OPR hikes in each upcoming MPC meeting.We maintain our OVERWEIGHT call on the sector, with top picks leaning towards dividend countersto shelter against uncertainties, beingMAYBANK (OP; TP: RM11.05) and AFFIN (OP; TP: RM2.45).

(Note: BNM had reclassified its presentation of segments in the recent statistics release. While there may be differences against past reports, we do not believe the new readings to be alarming.)

Loans growth undeterred by rate hike. In July 2022, system loans reported a 5.9% YoY growth as compared to July 2021 where the second loan moratorium was implemented. Despite netting two OPR hikes on a year-to-date basis, household loans continued to pace steadily (+0.4% MoM) while business portfolio (+0.3% MoM) appears to be sustained by a return of construction activities. Given the current trajectory, we believe our industry growth target of 5.0-5.5% could be conservative, with levels at5.5- 6.0% being more likely (assuming a consistent 0.5% MoM growth is achieved in the remaining months). (Refer to Table 1-3 for breakdown of system loans).

Applications (+80% YoY, +4% MoM) fueled by working capital needs. July 2022 total applications was lifted entirely by more business loans (+26% MoM) while household applications (-10%) took a back seat, possibly as retailers rethink borrowing decisions amidst higher interest rates. Although loans approval appears to be tapering down (-5% MoM), recall that June 2022 saw a clearing of application backlogs post-Raya festivities; hence, we see current readings as modest. (refer to Table 4-5 for breakdown of system loan applications).

Impairments creeping up post-repayment assistance programs. Total impaired loans saw a rise (+8% YoY, +4% MoM) possibly owing to the phasing out of repayment assistance programs, as certain graduated accounts happen to fall back on their repayments. That said, our read through across corporate presentations indicate that the number of affected accounts are still highly inconsequential against their existing loans books. A GIL ratio of 1.85% (June 2022: 1.79%, July 2021: 1.81%) is still well managed in our opinion, having seen historical readings of above 2%. (refer to Table 6-7 for breakdown of system impaired loans). Meanwhile, the reporting of industry loan-loss coverage to below 100% at 96.5% currently (June 2022: 100.0%, July 2021: 102.2%) indicate that impairment provisioning may have been excessive and that banks are progressively normalising their books or utilising their overlays.

Deposits still highly liquid. Although industry deposits saw a decline MoM (-1.3%), a supportive CASA mix of 30.7% (June 2022: 30.8%, July 2021: 30.3%) suggests that liquidity is still preferred amongst consumers. Although more attractive long-term deposit products are being offered in the market, we believe consumers could still be holding onto their reserves until a later period when more OPR hikes are seen. LDR came in at 91.2% (June 2022: 90.9%, July 2021: 87.3%). We keep our CY22 deposits growth expectations of 6.5-7.0% for now, as higher interest rates could still translate to higher deposits in the near-term.

Maintain OVERWEIGHT on the Banking Sector. We remain confident on our investment thesis that banking stocks will stay resilient in a rising interest rate environment (our house view of two 25 bps OPR hikes to come) and would lift the overall profitability of the sector. Current readings also leave us convinced that industry loans growth will remain supported by more buoyant economic activity as we catch up with the reopening of borders. The banks will also benefit from lower impairment allowances as asset quality risks diminish, leading to lower provisions. In terms of top picks, we still like 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: RM2.45) presents opportunities with the return of earnings growth prospects, thanks to its AIM22 initiatives. Prospective special dividends from the disposal of AHAM could further boost its decent yield of 5- 6%.

Source: Kenanga Research - 1 Sept 2022