July 2023 system loans grew 4.2% YoY, within our 4.0%−4.5% target in anticipation of modest economic activities in 2HCY23. This could be backed by our revised in-house GDP target of 3.7% for CY23. However, we believe loans growth may still show resiliency given household loan demand that remains supportive. Gross impaired loan (GIL) was stable at 1.76% which may lead banks to be more willing to lend.

Meanwhile, deposits are also mildly shedding with CASA ratios expected to remain stable as banks could possibly stay away from price competition in the near term. We do not anticipate further OPR hikes in CY23 which may disrupt product margin optimisation for the banks.

We maintain our OVERWEIGHT call on the sector. While the sentiment for the sector is picking up at encouraging levels, more selective investors may still seek tactical opportunities as added merits to back fundamental performance. We recommend names such as: (i) CIMB (OP; TP: RM6.00) for its earnings growth with renewed dividend prospects, (ii) PBBANK (OP; TP: RM4.40) for possible resurgence of interest from clarity in its shareholdings, and (iii) AMBANK (OP; TP: RM4.45) as we re-visit its consolidation prospects.

Easing growth persists. In July 2023, system loans grew by 4.2% YoY, in line with our CY23 expectations of 4.0%-4.5%. We continue to see households (+5.4%) leading with the most traction seen in residential properties (+6.9%) as prospective homeowners move towards affordable housing in this high-rate environment. Meanwhile, business loans (+2.4%) were once again fuelled by a revitalisation of the services industries. On a MoM basis, household loans still grew by 0.2% but we noted a continued shrinking of business loans (-0.3%) likely due to businesses not renewing working capital funding (refer to Tables 1−3 for breakdown of system loans).

Applications also coming off (-6% YoY, +7% MoM), as expected, with business loans being the sole contributor as the higher rate environment may be dampening the appetite for more borrowings. Meanwhile, households are still picking up more borrowings but with a notable increase arising from personal loans and hire purchases (refer to Tables 4−5 for breakdown of system loan applications).

GIL largely stable. July 2023 GIL reported at 1.76% (June 2023: 1.76%, July 2023: 1.85%) which is encouraging as it could indicate that previously “troubled” accounts which missed payments during the festive seasons have recommitted with their repayment obligations. Industry loan loss coverage also seems to be flatlining at 91.5% (June 2023: 91.8%, July 2022: 96.5%) possibly as most banks have come to equilibrium with regards to the exhaustion on pre-booked provisions. Meanwhile, CET-1 ratio for the industry is rising at 15.0% (June 2023: 14.8%, July 2022: 14.8%) as industry players are topping up capital post dividend declarations (refer to Tables 6−7 for breakdown of system impaired loans).

CASA stays muted. System deposits came in at 5.3% YoY growth, within our CY23 deposits growth target of 5.0%-5.5%. CASA stayed stable at 28.0% (June 2023: 28.2%, July 2022: 30.7%) as banks are falling back on attractive fixed deposit products to keep funding cost manageable. Until we experience another shift in OPR, we suspect levels could remain stable.

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.

Post 2QCY23 reporting season, we reaffirm our 3QCY23 top picks as investors continue to ride on the sector-wide recovery. We highlight CIMB which is expected to report leading earnings growth where some peers could only see more modest performance. Meanwhile, the group is also adopting a more generous dividend payout, which could fuel surprise dividend payments should it decide to exercise higher-than-expected writebacks from its management overlays. We also like PBBANK as the large outflux of foreign investors from the stock may be unwarranted, seemingly only justified by the 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 Sept 2023