February 2023 system loans growth registered a 5.2% YoY growth, within our 4.0%-4.5% target for now in anticipation of possible easing in the latter half as pending inflationary pressures may drag overall activity. That said, immediate-term numbers could stay lofty, spurred by upcoming seasonality factors and higher primary market home purchases.

Gross impaired loans (GIL) continue to linger at manageable rates (1.76%) with banks still holding on to sizeable provisions to cushion unexpected blows (loan loss coverage: 95.8%). Meanwhile, deposits may show persisting favour towards higher-yielding termed deposit products from the ongoing price competition as banks compete to lock in cheaper funding costs. Given the current optics, we believe BNM could keep OPR stable at 2.75% for the rest of the year, in line with their “conditional pause” as macro uncertainties remain.

We maintain our OVERWEIGHT call on the sector with top picks being names with highly conservative fundamentals. In the wake of global banking meltdowns, investors may demand stronger safety nets from banks to consider them investible. With that, we recommend: (i) PBBANK (OP; TP: RM4.90) for its leading GIL ratio supported by highly collateralised books, and (ii) RHBBANK (OP; TP: RM7.10) for their leading CET-1 ratios in addition to now substantially more attractive dividend prospects (7%-8% yield).

Tracking healthily. In Feb 2023, system loans grew by 5.2% as both household (+5.7%) and business accounts (+4.4%) continue to benefit from a reopened economy. We deem this to still be within our expectation of 4.0%-4.5% for CY23, accounting for possible softness in 2HCY23. At least for the early months, we should see additional entries of residential properties as prospective homebuyers may have only received financing from applications made during the previous interest rate up-cycle. Meanwhile, wholesale & retail businesses could have required more working capital needs to cope with busier activities. On a MoM basis, both segments did increase post possible New Year front loading. (Refer to Table 1-3 for breakdown of system loans).

Applications in preparation for 2QCY23 seasonality (+34% YoY, +29% MoM). There is a continued pick-up in applications, which could be coming ahead of Hari Raya seasonality in Apr 2023. In absolute terms, residential properties (+29% YoY, +36% MoM) made the biggest gains possibly with the shift towards secondary markets with more deferred commitments. Loan approvals also increased (+49% YoY, +27% MoM) in tandem with the rise in applicants (Refer to Table 4-5 for breakdown of system loan applications).

Familiar GIL readings. Feb 2023 GIL came in at 1.76% (Jan 2023: 1.73%, Feb 2022: 1.69%) which we deem to be normal levels. The sequential rise in GIL could be due to compounded inflationary pressures to consumer cash flows, especially for those who have recently exited assistance programs. That said, it is still fairly within recent historical averages of 1.6%-1.8% and could still be well contained by banks. Regarding management of delinquencies, industry loans loss coverage now hovers at 95.8% (Jan 2023: 97.4%, Feb 2022: 108.0%) indicating gradual consumption of provisions. We reckon these include preemptively booked provisions and economic overlays that could be further topped up if required (refer to Table 6-7 for breakdown of system impaired loans).

Termed deposits garnering interest. We have seen banks conduct aggressive deposits competition to capture a higher market share, mainly pertaining to fixed, termed deposit products in the recent months. Consequently, CASA level have eroded to 28.6% in Feb 2023 (Jan 2023: 28.8%, Feb 2022: 30.4%). This is in spite of overall deposits growing by 7.5% YoY, higher than our 5.0%-5.5% CY23 deposits growth expectation but we do anticipate moderation in the latter half of the year. With the expectations that OPR would remain flat, it is likely that said attractive deposit rates could taper off as well.

Maintain OVERWEIGHT on the banking sector. Recent readings paint a more upbeat outlook with loans and deposits picking up steadily while supported by manageable risk levels. However, we believe subsequent periods may not offer similar strengths with the expectations that higher inflation and uncertain macro factors may suppress overall activities. In spite of this, we continue to believe the banks will stay resilient as any shocks would be sufficiently buffered by their respectively high capital reserves as well as excess overlays and Covid provisions which could either be consumed or written back if conditions are more favourable. That said, we are cognizant of the depressed state of banking stocks amidst recent fall-outs of several high-profile foreign financial institutions. Hence, we recommend selective names that offer greater safety nets amongst peers while avoiding banks with higher non-interest income exposure, as investors may also view this space with greater caution.

For 2QCY23, we promote: (i) PBBANK as it is the leading bank in terms gross impaired loans (GIL) reading at 0.4% (vs peer average: 1.5%) backed by a highly collateralised loans book thanks to a substantial mortgage portion (41% of total books). Meanwhile, its recent shares sell-down owing to uncertainties of its shareholder and ownership structure may see an inversion when clarity on the matter unfolds. We also like (ii) RHBBANK as we believe the relevancy of strong capital safety will be in the limelight once more. RHBBANK continues to lead with its CET-1 buffers (17% vs. peers’ average of 14%). On the other hand, RHBBANK’s dividend prospect is become more promising with targeted payouts of c.55% looking to generate yields of 7%-8%. Also, developments on its upcoming digital bank with Boost could support interest in the stock.

Source: Kenanga Research - 3 Apr 2023