September 2022 system loans rose by 6.4% YoY (+0.6% MoM) in line with our CY22 industry growth target of 6.0-6.5%. Business loans would likely be the main drivers going forward on more working capital requirements against a rate sensitive household segment (as reflected by easing applicationsfor property financing). GIL readings are stable (1.82%,-2 bps MoM) and could stay at these normalised levels. In terms of deposits, industry growth of 6.2% is deemed in line with our 6.5-7.0% target for the year-end as higher rates appear to have commenced fundsmigration to longer-termed deposits,eroding CASA ratios.We anticipate two additional 25 bps OPR hikeseach intheupcoming MPC meetings.We maintain our OVERWEIGHT call on the sector, with top picks favouring optimal loans (high SME, low fixed rate financing) and deposit (high CASA) books with added merits. Our stock picks areCIMB (OP; TP: RM6.35), MAYBANK (OP; TP: RM11.05) and ABMB (OP; TP: RM4.20).

Solid readings sustainedacross the board.In Sep 2022, system loans reflected a 6.4% YoY increase as both household (+6.6%) and business (+6.2%) benefitted from better conditions. This is within our expectations for industry loans growth to stand at 6.0-6.5% at Dec 2022. On a MoM basis, household loans (+0.6%) saw the most support from a growing profile of residential properties while business loans (+0.6%) showed strength in financial and insurance services, as corporates seek to de-risk from more operating activities. (Refer to Table 1-3 for breakdown of system loans).

Tapering applications (-7% MoM), as expected. Sep 2022 total application stayed stronger on a YoY basis (+34%) but came off on a monthly basis at is normalises from peakish levels. The previous influx from more housing loan applications (-11%) is easing as the interest rate upcycle is likely suppressing retail appetite for property accumulation. Meanwhile, on the business front (-2%), working capital needs (+6%) remained buoyant in keeping up with greater economic movements but came off from construction purposes (-36%) as workflows have been challenged by labour issues and material limitations. On the flipside, loan approvals trends (+37% YoY, -14% MoM) are in tandem with applications (refer to Table 4-5 for breakdown of system loan applications).

Asset quality unconcerning. Total impaired loans rose by 12% YoY in line with the increase in loans portfolio, but this appears to be entirely driven by business loans (+21%) which could be of higher risk and uncollateralised in nature as compared to household loans. On the other hand, impairment readings were flattish on a MoM basis which could be an early indication that troubled accounts have already been flushed out. Industry GIL as of Sep 2022 stood at 1.82% (Aug 2022: 1.84%; Sep 2021: 1.73%) while loan loss coverage was also stable at 97.8% (Aug 2022: 97.3%; Sep 2021: 109.6%) (refer to Table 6-7 for breakdown of system impaired loans).

Hints of cash migration at bay. Industry deposits are still expanding (+6.2% YoY, +1.4% MoM), in line with our CY22 deposits growth expectations of 6.5-7.0% on grounds that fixed deposits could pick up meaningfully in 4QCY22. CASA levels are starting to taper at 29.6% (Aug 2022: 30.3%, Sep 2021: 30.3%) as we note higher levels of foreign currency deposits, indicating less confidence in local currency alongside a general increase in higher yielding products as interest rates become more attractive. This could further intensify as competition intensifies between the banks to keep funding costs low ahead for further OPR hikes.

Maintain OVERWEIGHT on the banking sector. The stronger loans performance is supportive of our investment thesis that the banks are a key beneficiary of a recovering economy, with greater inflows coming in from business loans as households may sit back from higher interest rates. We continue to expect two more 25 bps OPR hikes before BNM would review the adequacy of a 3.00% OPR standing in the later half of CY23. In spite of our optimism, we opine investors could gain better value by positioning defensively with names that could stand out. For the 4QCY22 season, we feature the following as our top picks :- (i) CIMB (OP; TP: RM6.35) for defensive NOII reporting as trading performances are supported by its regional entities. It also commands on of the highest CASA books amongst the large cap banks. Notably, we have awarded CIMB with a 4-star ESG rating for its sustainable financing efforts; (ii) MAYBANK (OP; TP: RM11.05) which remains our dividend favourite (7-8% yield) and provide shelter for investors preferring more secured returns. As the market share leader in loans and deposits, MAYBANK would also be widely exposed to the benefits of economy reopening; and (iii) ABMB (OP; TP: RM4.20) from amongst the small cap banks for being the leader in SME loan proportions (30%) which is expected to be the highest growth segmentas well as forits highest CASA mix (50%). The stock’s fundamentals are also comparatively better than its larger cap peers in terms of ROE (10%) and dividend yields (6%).

Source: Kenanga Research - 1 Nov 2022