April 2023 system loans grew 4.5% YoY, within our 4.0%-4.5% target for the year as the month saw slower activities amidst Hari Raya festivities. While we do anticipate a pick-up going forward, it could be skewed towards business accounts as household spending may be more guarded, undermined by inflation.

Gross impaired loans (GIL) saw a slight increase to 1.78% but we see this level to be manageable. Banks continued to keep hefty provisions and overlays, even after some selective writebacks as long-term concerns could be waning. On the other hand, we see deposits experiencing a sequential decline, likely also attributed to more festive spending. Fixed deposits may continue to see more favour as rates are now more attractive. While the banks are seeking to moderate its offered rates, May 2023’s surprise OPR hike provides room for banks to support margins further. We do not anticipate further OPR hikes for the rest of the year.

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 (c.8% yield).

Slower activities in festive seasons. In Apr 2023, system loans grew by 4.5% YoY on higher household (+5.2%) and business (+3.5%) accounts. This is within our expectation of 4.0%-4.5% for CY23 with the month being induced by seasonal softness amidst Hari Raya festivities. On a MoM level, total system loans was flat as a result of slight increments in household lending (+0.2%) being offset by a small decline in business loans (-0.4%). We maintain our view that household income may be hurt by inflationary pressures, affecting household demand for loans and skewing large-ticket borrowings to more cash flows favourable options (i.e. property purchases to be secondary - market driven to minimise upfront downpayments). That said, healthy economic readings may present opportunities for businesses to expand operations in the medium term (refer to Tables 1−3 for breakdown of system loans).

Softer application followed suit (-13% YoY, -24% MoM). Coinciding with the seasonal softness, there are fewer applications entering the system. This could also be attributed to the comparatively higher borrowing rates arising from the interest rate upcycle, but we believe this could be mostly true at the household front. With May 2023 also experiencing an unexpected 25 bps hike, this could pause applications for another month. (refer to Tables 4−5 for breakdown of system loan applications).

Slight uptick in GIL. Apr 2023 GIL slightly rose to 1.78% (Mar 2023: 1.74%, Apr 2022: 1.72%). While this is deemed to still be within a “normal” range, the uptick could come as payments may have been purposefully delayed to support festive spending. Industry loan loss coverage continued to be utilised, now at 94.2% (Mar 2023: 95.8%, Apr 2022: 103.6%) as we gathered that most corporates have exercised gradual write-backs of pre-emptive provisions and economic overlays. Meanwhile, industry CET-1 readings are kept stable at 14.8% (Mar 2023: 14.9%, Apr 2022: 14.2%). (Refer to Tables 6−7 for breakdown of system impaired loans)

Deposits growth is also seeing some easing (+6.4% YoY, -0.5% MoM), registering the second consecutive month of decline. Still, we see the current base to be within our CY23 deposits growth target of 5.0%-5.5% with further moderation to be expected in the second half. CASA ratio continued to decline, to 29.0% (Mar 2023: 29.2%, Apr 2022: 31.3%) as termed deposits gained more favour as rates became more attractive. While we anticipate long-term rates to normalise, it may still pose as a more attractive alternative for cash-rich customers to migrate their savings.

Maintain OVERWEIGHT on the banking sector. While the recent month’s numbers indicate moderation, we believe the extent could be less severe on a full-year basis given the attached seasonal factors. Local economic macros still indicate a highly supportive operating environment to elevate household income and economic output, with 1QCY23 GDP registering at 5.6%. However, as headline inflation still appears to be troublesome at 3.3%, the net benefit could be muted. That said, the banks remain poised to ride on stronger economic prosperity as liquidity remains flushed. Meanwhile, most banks still maintain a sizeable amount of provisions and are not shy in topping up their overlays should recessionary concerns materialise. 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 - 1 Jun 2023