Kenanga Research & Investment

Banking - Jan 2023 Statistics: Numbers Still Well Anchored

Publish date: Wed, 01 Mar 2023, 11:28 AM

January 2022 system loans growth opened the year with a 4.9% YoY growth, within our 4.0%-4.5% target for the full year as we account for possible easing in the latter half. Uninspiring loan application numbers only fuel the suspicion, as a higher interest rate environment may curb borrowing and instead call for greater savings into better yielding fixed deposit products. Meanwhile, gross impaired loans (GIL) stayed sequentially stable at 1.73% but may progressively creep up as strains from persistent inflationary pressures become more apparent. Until then, we take comfort in astute loans provisioning and highly sufficient loan loss coverage readings should an unfavourable turn occur. With regards to the upcoming BNM MPC meeting, we believe it is unlikely for the OPR to see another 25 bps hike from its hiatus in January as BNM continues to play an observatory role. 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: RM10.10), CIMB (OP, TP: RM6.55) and ABMB (OP, TP: RM4.40).

Bustling start. In Jan 2023, system loans grew by 4.9% YoY following growth in both household (+5.6%) and business accounts (+3.9%). We deem this to be within our expectation of 4.0%-4.5% for CY23 for now, as we anticipate some cooling off to occur as we progress into the year. Housing and vehicle hire purchase appear to be the predominant drivers for the household front, likely compounded from prior months’ applications. Meanwhile, wholesale & retail trade seem to make up the larger part of business use. On a MoM basis, business loans declined (-0.8%) likely due to borrowers having used their funds to act ahead of New Year festivities. On the other hand, household loans demonstrated consistent MoM growth (+0.3%) as private consumption seems to be unyielding (Refer to Table 1-3 for breakdown of system loans).

Slowing growth to cascade from fewer applications (-13% YoY, -8% MoM). The diminishing applications could be triggered by higher borrowing cost as a result of the four OPR hikes seen in CY22. This has mostly affected loan applications for residentials (-30% YoY), commonly being of higher value. Loans approvals on the other hand also declined in tandem (-6% YoY, -14% MoM) on generally fewer applicants flowing through (Refer to Table 4-5 for breakdown of system loan applications).

Asset quality remains healthy. Likely due to the abovementioned higher borrowing cost, total impaired loans rose 8% YoY but did not show meaningful additions on a MoM basis. GIL ratio also seems to be stable at 1.73% in Jan 2023 (Dec 2022: 1.72%, Jan 2022: 1.68%). That said, there is an expectation for GIL readings to pick up as inflationary pressures mount overtime, mainly undermining lower income consumers. At the meantime, industry loan loss coverage still appears adequate at 97.4% (Dec 2022: 98.2%, Jan 2022: 109.5%) as banks continue to be wary of heightened delinquencies to come (refer to Table 6-7 for breakdown of system impaired loans).

CASA losing favour. Although system deposits marked a 7.0% YoY increase in Jan 2023, we keep out 5.0%-5.5% CY23 total deposits growth expectations unchanged for now. The industry is undergoing a shift where a stable OPR unveils clearer deposit rates comparison by consumers, driving banks to offer more competitive savings rates than before. This would hence translate to higher cost of funds for the banks but would lock margins in the event of a subsequent OPR hike. CASA readings for Jan 2023 stood at 28.8% (Dec 2022: 29.0%, Jan 2022: 30.5%).

Maintain OVERWEIGHT on the banking sector. The end of the CY22 reporting season did unveil common concerns amongst banking corporates whereby interest margin gains from the OPR upcycle would not sustain as deposits competition would only intensify further. Meanwhile, economic factors may indicate slower overall consumption in the coming periods. Amidst this, we still believe the sector holds great value and provides shelter in its fundamental resiliency, as all banks practice highly sufficient asset quality management in keeping loan loss coverage levels at least close to 100% while having built up provisional overlays should widespread defaults occur. However, conversations also lean into potentially writing back these overlays (mainly to support repayment assistance books) to bring some relief to earnings. This may also indicate that the sector as a whole may not be in a worse operating environment. At the very least, the lapsing of prosperity tax would bring about much needed normalisation to bottomline that could funnel to better dividend payments to shareholders.

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: RM10.10) for its persistently high dividend cushions (7%-8% yield) and leading market share, (ii) CIMB (OP, TP: RM6.55) for resilient non-interest income stream performance led by regional operations, and (iii) ABMB (OP, TP: RM4.40) 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 - 1 Mar 2023

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