November 2022 system loans growth came off 5.5% (Oct 2022: 6.5%) due to a 0.1% MoM contraction led by business loans. This will cause a miss in our CY22 industry loans growth target of 6.0-6.5% and the system loans growth to fall more closely to 5.5-6.0%. Seasonal weakness is expected to ease but may not translate to overly bullish performance as economic growth is also anticipated to mellow from 2022’s low base. On a brighter note, gross impaired loans (GIL) stayed flattish as most troubled accounts may have been fully reflected in system readings. Meanwhile, deposits too saw a sequential decline (-0.4% MoM) as private spending could have picked up, alluding to the year-end celebrations. That said, Nov 2022 growth of 4.8% YoY is shy from our CY22 6.5-7.0% target, meaning deposits growth could return to 5.0-5.5% levels. We anticipate a final 25 bps OPR hike in Jan 2023 MPC meeting before landing at a stable rate environment. We maintain our OVERWEIGHT call on the sector, with top picks favouring stocks which we believe have a solid mix of resilience and earnings growth prospects. Our stock picks are MAYBANK (OP; TP: RM10.40), CIMB (OP; TP: RM6.40) and ABMB (OP; TP: RM4.20).

Slippage on the business front. In Nov 2022, system loans held a 5.5% YoY growth on relatively better conditions in both household (+6.0%) and business accounts (+4.7%). However, on a MoM basis, system loans stagnated at -0.1% as business loans registered a 1.0% drop sequentially amidst some support from households (+0.5%). The sequential decline appears to be mostly attributed by food manufacturers and real estate services; though we believe the former could be experiencing seasonal weakness whereas the latter could be strained by higher borrowing cost. To make up for Nov 2022’s shortfall, Dec 2022 is required to close with a 1% MoM system loans growth which we opine is unlikely given growth prospects that were just mostly agreeable. With that, we believe our projected 6.0-6.5% industry loans growth at Dec 2022 could be missed and the actual figure may fall closer to 5.5-6.0% (Refer to Table 1-3 for breakdown of system loans).

Applications cooling off. Nov 2022 total loan applications also came off (-10% YoY, -5% MoM) on both fronts. System approvals also saw 7% MoM contraction, indicating that lenders are being more selective on possibly tougher conditions ahead. That said, current readings on applications and approvals are still not the lowest year-to-date which were reflected in Jan and Feb 2022 when activities were just picking up (Refer to Table 4-5 for breakdown of system loan applications).

Steady GIL marks. Total impaired loans increased by 18% YoY in conjunction with the higher overall loans base, though the rise was mainly attributed by business loans (+24%) bearing the brunt of economic uncertainties, notwithstanding its less collateralised nature. On the flipside, the rise in household loan impairment (+8%) could be dragged by lower income groups that were unable to recuperate post repayment assistance programs. However, monthly readings are flat with only minute rises on both household and business accounts. This led industry GIL as of Nov 2022 to come in at 1.82% (Oct 2022: 1.82%, Nov 2021: 1.64%). Meanwhile, industry loan loss coverage is seeing some top ups at 98.1% (Oct 2022: 96.7%, Nov 2021: 114.0%) as corporates could likely be reinforcing their overlays against possible setbacks in 2023 (refer to Table 6-7 for breakdown of system impaired loans).

Deposits moderating on year-end spending. Similar to system loans, a MoM decline (-0.4%) tapered down YoY growth (+4.8%) which led to a miss to our CY22 deposits growth expectations of 6.5-7.0%. There could a seasonal uptick in Dec 2022 with year-end bonus payments which could support closing 5.0% growth, a level also initially anticipated in Jan 2022. CASA levels remained stable at 29.5% (Oct 2022: 29.5%, Nov 2021: 30.5%) but could also erode on more aggressive term deposit products amidst rising rates. System loan-deposit ratio was mostly stable at 86.2% (+0.3ppt MoM).

Maintain OVERWEIGHT on the banking sector. While the month’s report may indicate a start of looming concerns, we believe the banking sector would still demonstrate resilience with interest rate-backed support on earnings. We anticipate one 25 bps hike to occur in Jan 2023 MPC meeting to a 3.00% OPR, after which BNM is expected to monitor the situation. Slower loans growth is widely anticipated with our in-house GDP targets for 2023 coming in at 4.0-4.5%. Still, factors such as possible writebacks of provisions and lapse of prosperity tax could place banking earnings ahead of most industries, making them a possible safe haven against recessionary concerns.

For 1QCY23, we maintain our prior preferences to continue highlighting names with stronger backing to share price and earnings support, being: (i) MAYBANK (OP; TP: RM10.40) for its persistently high dividend cushions (7-8% yield) and market leading share, (ii) CIMB (OP; TP: RM6.40) for resilient non-interest income stream performance led by regional operations, and (iii) ABMB (OP; TP: RM4.20) for its strength in the SME space which is expected to deliver high growth in a recovery environment. It also commands solid ROE (10%) and dividend potential (6%) despite its significantly smaller market cap.

Source: Kenanga Research - 3 Jan 2023