October 2022 system loans grew by 6.5% YoY (+0.5% MoM) in line with our CY22 industry loans growth target of 6.0-6.5%. Broadly, more inflows are expected to be seen from businesses mainly on greater working capital needs as household demand for debt could wane on higher borrowing costs. Gross impaired loans are flattish, indicating that the current climate could be at equilibrium though corporates are reporting possibly higher delinquencies from rate-triggered inflation. In terms of deposits, industry growth of 6.9% YoY (+0.4% MoM) is also within our expectation (6.5-7.0% for CY22) with a budding interest on higher yielding deposits as product pricing are becoming more competitive. We anticipate one 25 bps OPR hike in the upcoming MPC meetings in 1QCY23. We maintain our OVERWEIGHT call on the sector, with top picks favouring optimal loans (high SME, low fixed rate financing) and deposit books (high CASA) with added merits. Our stock picks are CIMB (OP; TP: RM6.40), MAYBANK (OP; TP: RM10.40) and ABMB (OP; TP: RM4.20).

Recovery spillovers. In Oct 2022, system loans demonstrated a 6.5% YoY increase as both household (+6.3%) and business loans (+6.3%) regained strength from a better economic landscape. This is within our expectations that industry loans growth would close at 6.0-6.5% at Dec 2022. On a MoM basis, household loans (+0.5%) saw expansion from higher residential property demand and hire purchases with credit card spending seeing the highest sequential increase. Meanwhile, business loans (+0.9%) continued to be led by greater working capital requirements with logistics sectors being a key driver during the month. (Refer to Table 1-3 for breakdown of system loans).

Easing applications persisted (-7% MoM). Oct 2022 total application was up 13% YoY but continued to show a gradual reduction for the third consecutive month. Household loans are likely tapering off due to diminishing retail appetite as borrowing cost rises in the ongoing interest rate upcycle, especially on variable-rate housing loans. Business loans applications also reflect a monthly easing (refer to Table 4-5 for breakdown of system loan applications).

Stable reporting of asset quality. Total impaired loans rose by 15% YoY in line with the increase in overall loans base, but business loans contributed predominantly to the rise (+23%) due to these accounts being less collateralised as opposed to household loans. Meanwhile, there was a slight increase in households MoM as certain retail accounts may have not been able to financially recoup post-graduation from respective targeted repayment assistance programs. Broadly, industry gross impaired loans as of Oct 2022 came in at 1.82% (Sep 2022: 1.82%, Oct 2021: 1.69%). Industry loan loss coverage appears to be reducing at 96.7% (Sep 2022: 97.8%, Oct 2021: 111.7%) possibly as corporates begin to utilise and/or writeback provisions set in place. (refer to Table 6-7 for breakdown of system impaired loans).

Term deposits picking up. Industry deposits continued to show strength (+6.9% YoY, +0.4% MoM), in line with our CY22 deposits growth expectations of 6.5-7.0% as interest in higher yielding products could come in the remaining months, riding on more rewarding rates. The migration is slowly becoming apparent as CASA levels started to trickle at 29.5% (Sep 2022: 29.6%, Oct 2022: 30.2%). Competition for deposit will likely to worsen as banks seek to capture as much low-cost funds as possible ahead of further anticipated OPR hikes. Meanwhile, system LDR remained relatively stable at 85.9% (+0.2ppt MoM) as loans growth is also pacing together with deposits.

Maintain OVERWEIGHT on the banking sector. With OPR having seen four 25 bps hikes to 2.75%, we believe the banking sector will once again be in a highly competitive cycle as banks strive to optimise their funding yields. We anticipate one more rate hike in 1QCY23 before BNM may take a more observative approach. At present, we are assured that healthy domestic economic prospects will keep loans demand strong. Still, there are concerns arising from recessionary risks that could put a drag on asset quality as certain accounts are already showing signs of delinquency. Additionally, unforeseen shifts in global macros may stress overall business activities. With that in mind, we continue to make our picks selectively, skewing to names that have defensive angles and firm market positioning.

For the 4QCY22 season, we feature the following as our top picks :- (i) CIMB (OP; TP: RM6.40) for defensive NOII reporting as trading performances are supported by its regional entities. It also commands one 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: RM10.40) 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 segment as well as for its 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 Dec 2022