Sep 2023 system loans increased by 4.3%, 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. We anticipate business loans to be resilient, making up for the potential softness from household loans as home borrowing cost may be less favourable. On the flipside, industry gross impaired loans (GIL) appear to retract to much healthier readings at 1.72%.

Deposits are likely to remain light on CASA despite stable interest rates and moderating product pricing due to depositors still remaining locked out of the market. We anticipate OPR to maintain at 3.00% till end-CY24, which could allow the banks plenty of room to reoptimize their product margins.

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.

Books building. In Sep 2023, system loans grew by 4.3% YoY, in line with our CY23 expectation of 4.0%-4.5%. Residential properties continued to be the main attributor to household loans growth (+5.6%). On the other hand, business loans (+2.6%) were mainly lifted by financial service industries. On a MoM basis, business loans (+0.9%) outpaced household loans (+0.6%) likely due to a rate-stable environment allowing businesses better debt planning ahead (refer to Tables 1−3 for breakdown of system loans).

Applications at cross roads (+11% YoY, -4% MoM). We observe that household loan applications are easing, possibly with prospective homeowners reevaluating their decisions to take on a mortgage amidst inflationary pressures. This is reflected in the stark MoM drop of 11% for residential properties. On the flipside, non-residential properties saw a surge in applications (+36% MoM) possibly due to a rising demand for commercial and industrial assets to tap into an improving business environment (refer to Tables 4−5 for breakdown of system loan applications).

Asset quality breathing some relief. Sep 2023 GIL registered at 1.72% (Aug 2023: 1.78%, Sep 2022: 1.82%). The improvement mainly came from households, where it is likely that previously missed payments during 2QCY23 seasonality could have caught up. More selective borrowing could have also led to fewer delinquencies. That said, industry loan loss coverage saw its first increase after 9 months at 91.2% (Aug 2023: 90.6%, Sep 2022: 97.3%) as banks may be loading up on provisions in anticipation of possible widening macro concerns with our soft domestic currency (refer to Tables 6−7 for breakdown of system impaired loans).

CASA uninspiring. System deposits grew 4.3% 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. However, CASA levels remain moderate at 28.1% (Aug 2023: 28.3%, Sep 2022: 29.6%) despite the end of past intense fixed deposits competition. This could indicate yield-seeking depositors may continue to be locked into their term deposits and may not re-enter the market, possibly until year-end

Maintain OVERWEIGHT on the banking sector. We remain confident in the resilience of the banking sector amidst other industries likely to be adversely affected by volatility in commodity prices and exchange rates. With a stable-rate environment likely to be sustained in the coming months, it poses an opportunity for banks to recalibrate their profit rates and regain lost margins from past deposits competition. We also opine asset quality to be mostly unconcerning as most banks remain highly capitalised, albeit prepared to further load up on provisions if necessary.

For Top Picks, we continue to feature CIMB as they remain to be one of the best-poised players to demonstrate above-industry 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 lies 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 - 1 Nov 2023