March 2023 system loan growth came in at 5.0% YoY growth, within our 4.0%−4.5% target as economic activities could taper down in 2HCY23 from suppressive inflationary pressures. In the meantime, strong readings are supported by seasonal factors condensed in recent months and more primary market home purchases.

Gross impaired loans (GIL) stayed firm at 1.75% which we see as palatable amidst comparatively better operating conditions with banks still maintaining ample provisions against unexpected shocks (loan loss coverage: 95.8%). On the flipside, deposits appear to be temporarily affected by seasonal factors, which led to periodically higher CASA and a pause to monthly accumulation. We continue to believe that BNM could keep OPR stable at 2.75% for the rest of the year, in line with its “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 its leading CET-1 ratios in addition to now substantially more attractive dividend prospects (7%−8% yield).

Market conditions still supportive. In Mar 2023, system loans grew by 5.0% YoY, lifted by both household (+5.4%) and business accounts (+4.4%). We deem this to still be within our expectation of 4.0%−4.5% for CY23 because while market conditions are expected to still be favourable in the near term, it may soften as inflationary pressures become more prevalent in the latter half of the year. For the time being, we anticipate household demand for loans to be mostly held by more primary market property purchases as commitments into secondary market transactions become costlier to cash flow. Meanwhile, wholesale & retail businesses appear to lead in demand for working capital with some pick-up seen in financial services as well. On a MoM basis, both segments were likely aided by an increase in funds required ahead of Hari Raya festivities (refer to Tables 1−3 for breakdown of system loans).

Applications continue to pour in (+12% YoY, 23% MoM). We see a sustained in flow of both household and business loans, likely spurred by the upcoming Hari Raya seasonality in Apr 2023. Key contributors continued to be residential properties (+5% YoY, +24% MoM) with transport vehicles also picking up (+17% YoY, +17% MoM) perhaps in line with new model releases. We note that construction activities saw a significant rise (+96% YoY, +120% MoM) as contractors may be planning to roll out projects post-Hari Raya festivities. Meanwhile, loan approvals also increased (+23% YoY, +28% MoM) in tandem with the growth in applications (refer to Tables 4−5 for breakdown of system loan applications).

Asset quality manageable. Mar 2023 GIL was stable at 1.75% (Feb 2023: 1.76%, Mar 2022: 1.70%). We gather that this is in spite of the banks may be slightly less restrictive with credit screening concerns as Covid-19 risks dissipate. Industry loan loss coverage continued to linger below 100% at 95.8% (Feb 2023: 96.3%, Mar 2022: 104.3%) from the gradual consumption of provisions, although we note that listed institutions are maintaining reserves above this level. On the flipside, industry CET-1 ratios were relatively stable at 14.8% (Feb 2023: 14.8%, Mar 2022: 14.7%). (Refer to Tables 6−7 for breakdown of system impaired loans)

More cash for seasonal spending. Deposits saw its first MoM decline (-0.1%) in five months although this still registered as a lofty 7.0% YoY growth. Similar to our loan growth expectations, we anticipate moderation in the latter half of the year to meet our 5.0%−5.5% CY23 deposit growth target. CASA ratio also saw a sequential rise to 29.2% (Feb 2023: 28.6%, Mar 2022: 30.3%) as depositors were likely prioritising liquidity during the festive season. We expect CASA levels to erode further in the medium term as termed deposit rates are growing more attractive.

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 see similar strengths with expectations that higher inflation and uncertain macro factors may suppress overall activities. In spite of this, we continue to believe that 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 of GIL readings 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 - 2 May 2023