We maintain our OVERWEIGHT call on the banking sector. We project a loans growth range of 4.5%-5.0% in CY24, which is a tad higher than our CY23 assumption of 4.0%-4.5% premised upon a greener economic landscape. OPR could remain stable at 3.00% throughout CY24 which may lead to more optimised product rates for consumers, but also as a measure to keep inflation in check. With its Apr 2024 deadline looming, most digital banks are expected to be launched soon with GX Bank being the first to enter the market. For now, we do not anticipate meaningful pressures from here to traditional banks albeit they will likely capture the attention of consumers with its high-yielding deposits structure. For 1QCY24, our Top Picks are: (i) CIMB (OP; TP: RM6.30) for its strengthening regional portfolio which could include profit contributions from certain assets, (ii) AMBANK (OP; TP: RM4.80) for its strengthening books and possible positive near-term reaction from upcoming tax credits, and (iii) ABMB (OP; TP: RM4.30) for its leading yet sustainable fundamentals which outpace certain larger-cap names, despite being the smallest listed bank.

Stronger CY24 loans growth. We project a loans growth range of 4.5%-5.0% in CY24, which is a tad higher than our CY23 assumption of 4.0%-4.5% (CY22: 5.7%). This also ties in with our in-house GDP growth of 4.9% for CY24.

The system loans growth in Oct 2023 came in at 4.0%. Household loans remained the key driver of overall loans performance as business loans had stayed limped with the year’s operating landscape yet to paint favourable conditions for businesses to aggressively expand. This could also be attributed to uncertainties of Aug 2023’s state election outcome.

We expect CY24 loans growth to continue to be supported by affordable homes which also appear to be the preference for developers within their new launch pipelines. That said, we opine secondary market transactions could also see some pick-up as banks may now be more competitive with the margin spread for newly onboarded mortgages. On the business front, fewer uncertainties with regards to domestic economic policies and interest rates may spur business to once again focus on expanding. Meanwhile, a weaker domestic currency may be a booster for exporters and could drive spending from foreign tourists, possibly stimulating growth in these areas.

Steady-state OPR outlook may offer mixed outcomes. We anticipate OPR to remain stagnant at 3.00% throughout CY24. This is premised on prolonged containment of inflationary pressures with a weak ringgit exaggerating imports. This may be further stirred by the pending subsidy rationalisation and to a lesser extent, the implementation of luxury taxes. On the flipside, the likelihood for OPR cuts could stem from the materialisation of a recession in foreign markets (namely, US markets).

A stable OPR can lead to several outcomes: (i) as banks' product margins become more apparent, it may ignite competition in the financing products with banks shifting away from deposit-focused competition, (ii) for prospective borrowers, expectations of stable interest rates may boost their willingness to borrow as perceived opportunities for interest savings become less evident, and (iii) as fixed income investments may experience reduced volatility, diminishing trading opportunities and thereby limiting trading gains, prompting banks to focus more on enhancing net interest income to sustain profits.

Digibanks ready to prowl. Closing in on BNM’s deadline of Apr 2024, GX Bank was the first to launch its digital banking platform with only deposit-based functionality for the time being. We opine borrowing facilities would be introduced over time when its user database establishes a certain maturity where they may more effectively access credit risks. The platform features a tie-in with the Grab superapp which aid in its user acquisition. While they do appear to offer highly attractive deposit rates at daily rest, we believe it may not be a significant competitor to traditional players as digital banks are still restrained by an asset cap of RM3b during their 3 years-minimum foundational phase. Still, further observation is required to identify differentiating strengths that digital banks may have in its lending products.

Maintain OVERWEIGHT on the banking sector. We believe the banking sector’s resilience will continue to be relevant to investors, especially with more prominent recessionary concerns seen in key regional markets. Domestically, we see asset quality controls to remain tight, governed by BNM’s strict requirements and prudent management by the banks which most still maintain some level of management overlays. Meanwhile, liquidity is expected to be sufficient as the focus on building their respective loans book and deposits book appear to be equal. At current price points, banking dividend yields still lead with 6%- 7% possibly being offered.

For top picks, we opted to focus on high growth merit names which could see both near-term and long-term interest for investors, being CIMB, AMBANK and ABMB.

(i) CIMB – Although the group may not be a leader in terms of earnings growth in CY24, we believe the group’s regionally diversified operations demand attention has they had provided shelter against adverse local conditions, particularly during recent pandemic years. The group is also due to ride on a leaner operating environment being at the tail-end of its cost savings efforts, with further plans likely in the works. With several business units expected to break even soon, this may further accelerate earnings growth should it materialise sooner than expected.

(ii) AMBANK – AMBANK is poised to deliver new grounds with regards to its ROE expansion. The group is also a notable player in the SME space which could be one of the leading growth segments on a revitalised economic environment. In the near-term, a pending tax credit of RM537m may lead to a positive knee-jerk on its stock. It would be accretive towards the group’s capital building efforts.

(iii) ABMB – Between the smaller cap banks, we continue to like ABMB as it offers solid fundamentals which are comparable to its larger cap peers, with dividend yields of c.7% (sector average: 5%) and ROEs of c.11% (sector average: 10%). The group also possesses the largest proportion of SMEs to its books which could be drive its nearterm growth. Leading in terms of CASA as well, it offers ABMB greater flexibility when it comes to margin retention.

Source: Kenanga Research - 2 Jan 2024