Aug 2023 system loans increased by 4.2%, within our 4.0%-4.5% target as economic prospects may remain gradual from here on, with our in-house GDP target standing at 3.7% for CY23. Household loans could still see support with a greater interest from affordable housing. Meanwhile, gross impaired loans (GIL) continue to float at manageable levels at 1.78%.

Deposits may also continue to demonstrate modest growth but with a lower fixation on fixed rate products backed by our expectations of flattish OPR readings, possibly till end-CY24. A stable rate would allow for better product margin optimisation for the banks.

We maintain our OVERWEIGHT call on the sector, with a continued emphasis on tactical picks as investors may be selective with regards to balancing long-term fundamental strength and nearterm sentiment upliftment. We feature names such as: (i) CIMB (OP; TP: RM6.30) for its earnings trajectory which may outpace its peers in addition to better dividend prospects, (ii) AMBANK (OP; TP: RM4.80) for rising consolidation prospects fuelled by its more palatable book performance, and (iii) ABMB (OP; TP: RM4.30) as a small cap favourite given its largely comparable fundamentals which beats certain large caps. Its high exposure to SMEs could also translate to better-than-expected growth during an economic upturn.

Returning appetite. In Aug 2023, system loans grew by 4.2% YoY, in line with our CY23 expectation of 4.0%-4.5%. Household loans remain dominant (+5.5%) as the demand for residential properties is thought to be skewed towards more affordable housing transactions amidst higher borrowing cost. On the other hand, business loans (+2.2%) are holding up with support from service industries. On a MoM basis, both household and business loans grew by 0.7% as we reckon flattish OPR expectations have eased concerns on interest pressures and returned overall appetite to undertake loans (refer to Tables 1−3 for breakdown of system loans).

Applications flowing back in (+8% YoY, +13% MoM) with new business loan applications (+22% MoM) outpacing housing loans, likely as resumption of activities was supported by a more stable economic environment post-state elections, in Aug 2023 itself. Household (+6%) also saw growth across the board but we noted a significant contributor came from the purchase of securities as trading participation could be stimulated by the above (refer to Tables 4−5 for breakdown of system loan applications).

GIL slightly rising. Aug 2023 GIL came in at 1.78% (Jul 2023: 1.85%, Aug 2022: 1.76%) which we believe is still within a highly manageable range of industry players. GIL typically tapers between 1.60%-1.80% but may be recently more skewed to SMEs which may still see some challenges owing to higher input and forex costs. Meanwhile, industry loan loss coverage continued to taper down at 90.6% (Jul 2023: 91.5%, Aug 2022: 97.3%) as certain banks are progressively utilising past overlays (refer to Tables 6−7 for breakdown of system impaired loans).

Deposits growth moderating. System deposits came in at 4.6% YoY, which we deem to be within our CY23 deposits growth target of 5.0%-5.5% for now as we anticipate a pick-up towards the year-end. CASA was mostly stable at 28.3% (Jul 2023: 28.0%, Aug 2022: 30.3%) but we anticipate some slight expansion going forward as banks are likely to avoid further competition on the fixed deposits front. This may be potentially altered with another shift in OPR.

Maintain OVERWEIGHT on the banking sector. While we maintain our optimism on the sector on better overall forward macros, we believe investors may still be highly selective in their long-term picks. Plotting our projections into a sector matrix, we had filtered our top picks to be banks that are underappreciated despite their respective growth prospects in both dividends and ROEs.

For our Top Picks, we continue to feature CIMB as they remain to be one of the best-poised players to demonstrate aboveindustry growth thanks to their enlarging regional footprint. On the other hand, CIMB’s sizeable overlay relative to earnings present some handsome translation to earnings and special dividends. We also highlight 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 market share growth for the group should we anticipate better economic prospects in the medium-term. For smaller cap banks, we see potential in ABMB to be a favourite as it is fundamentally comparable to larger cap peers in both dividend and ROE. The group’s strength lie in its high proportion of quality SME accounts which also led the group to maintain one of the highest NIMs amongst its peers.

Source: Kenanga Research - 2 Oct 2023