Jun 2023 system loans grew 4.4% YoY, within our 4.0%−4.5% target in anticipation of modest economic activities in 2HCY23. This could also be reflected in moderating applications reported. Gross impaired loans (GIL) are stabilising at 1.76% following some pressures in early months, probably due to festive-driven missed payments.

Deposits continued to grow with CASA ratios showing hints of a return, possibly signalling the softening of fixed deposit competition. We do not anticipate further OPR hikes in CY23 which may disrupt product margin optimisation analysis for the banks.

We maintain our OVERWEIGHT call on the sector. Sector-wide weakness may lead to investors seeking more tactical opportunities than fundamental ones, proven right by recent share price performances. We recommend names such as: (i) CIMB (OP; TP: RM6.00) for its highest potential writeback gains amongst large-cap banks, (ii) PBBANK (OP; TP: RM4.40) for possible resurgence of interest from clarity in its shareholdings, and (iii) AMBANK (OP; TP: RM4.80) as we revisit its consolidation prospects.

Moderating growth. In June 2023, system loans grew by 4.4% YoY, in line with our CY23 expectations of 4.0%−4.5%. Households (+5.3%) led with credit card transactions showing the largest expansion (+14%). Meanwhile, business loans (+3.0%) saw the biggest uptick from the financial services segment (+12%) with manufacturing accounts notably declining (- 4.0%) likely as supply chain conditions improve. On a MoM basis, household loans picked up (+0.5%) but business loans fell short (-0.2%) as inflows were likely planned to only contain festive spending (refer to Tables 1−3 for breakdown of system loans).

Applications soften (-9% YoY, -11% MoM), as expected, perhaps owing to the pent-up applications during the prior months on heightened seasonal factors. The decline could also be attributed to May 2023’s unexpected 25 bps OPR hike which called for further repricing of banking rates. This may have triggered prospective borrowers to be more selective with their applications whilst seeking more competitive offerings (refer to Tables 4−5 for breakdown of system loan applications).

GIL showing some ease. Jun 2023 GIL came in at 1.76% (May 2023: 1.80%, Jun 2022: 1.81%). We had anticipated the prior month’s readings to be slightly toppish due to conscious missed payments in favour of prioritised festive spending. Nonetheless, this remained within our comfortable “normal levels” of 1.6%−1.8% on a system basis. Meanwhile, industry loan loss coverage is reporting progressive exhaustion at 91.8% (May 2023: 93.2%, Jun 2022: 98.6%) as certain banks may be weighing down on their provisions. On the flipside, industry CET-1 ratio is stable at 14.4% (May 2023: 14.6%, Jun 2022: 14.7%) (refer to Tables 6−7 for breakdown of system impaired loans).

CASA share returns. System deposits are also showing moderating growth with a flattish MoM reporting (+5.9% YoY), within our CY23 deposits growth target of 5.0%−5.5%. CASA ratio is showing its first notable MoM gain in Jun 2023 at 28.2% (May 2023: 27.8%, Jun 2022: 30.7%) in the last 14 months as industry rates are likely normalising from 2022’s interest rate upcycle. While this may translate to more favourable funding costs to the banks, they may in turn seek to narrow lending rates to gain market share instead.

Maintain OVERWEIGHT on the banking sector. A weaker perception could be led by discouraging local currency performance as well as generally less bullish production numbers painting our domestic landscape to be less attractive. Still, we continue to have confidence in the banking space for its resilient earnings and with average dividend yield of 6% providing an attractive shelter for longer-term investors amidst softening interest for the space.

For this 3QCY23 season, we believe investors may seek more tactical opportunities given the ongoing sector-wide weakness. We highlight CIMB as we believe investors may pay closer attention towards its write-back prospects closer to the end of the year, and CIMB’s sizeable overlay relative to earnings presents some handsome translation to earnings and special dividends. On the other hand, the group is also expected to report double-digit earnings growth in the coming years, where some peers could only see more modest performance. We also like PBBANK as the large outflux of foreign investors from the stock may be unwarranted, seemingly only justified by a weakening MYR undermining foreign portfolio holdings. The group also appears arrested by uncertainties in its future shareholding structure, but we believe any clarity from here only offers upside prospects as overall operations are expected to be fundamentally intact given its systematic importance to the local financial ecosystem. Being the safest bank in terms of asset quality readings, present levels offer cheap opportunities for entry. Lastly, we also favour AMBANK as we believe its current fundamentals are highly supportive of healthier discussions for M&As, which have in the past been frequently considered. The group is also one of the leaders in terms of SME profile, which is touted as a high-growth segment that could accelerate the group’s market share growth.

Source: Kenanga Research - 1 Aug 2023