Nov 2023 system loans increased by 4.9%, which we anticipate to slightly taper off to meet our 4.0%-4.5% target for CY23. We observe that there could be frontloading of loans with applications easing drastically. Approval rates appear to be coming off (51.1%) as the banks stay prudent to keep industry GIL levels healthy (1.69%).

Deposits continued to grow with the expectation that CASA readings could dilute on more attractive year-end fixed deposit rates to secure liquidity for CY24. That said, we do not expect rates to be as aggressively priced as seen in 4QCY22 on the back of stable OPR. We anticipate that it will remain at 3.00% till end-CY24, which may lead to competition and divert to financing products instead.

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. For 1QCY24, we continue to favour: (i) CIMB (OP; TP: RM6.30) for its improved earnings sustainability from its regional portfolios, (ii) AMBANK (OP; TP: RM4.80) for consolidation prospects and possible knee-jerk interest from tax credits, and (iii) ABMB (OP; TP: RM4.30) as a small cap favourite given its largely comparable fundamentals which beats certain large caps.

Stretching to the year-end. In Nov 2023, system loans grew by 4.9% YoY. We keep our CY23 expectation of 4.0%-4.5% in anticipation of generally slower lending demand in Dec 2023. Household loans’ (+5.8%) robustness was upheld by sustained mortgage needs while business loans (+3.5%) were better off thanks to improved retail and service sector conditions. On a MoM basis, household loans were overall expansionary (+0.6%) likely due to frontloading towards year-end targets. We opine that business loans (+1.0%) were backed by the above, with declines seen in agricultural and construction-related accounts (refer to Tables 1−3 for breakdown of system loans).

Applications halted, -19% MoM. Supporting our abovementioned suspicion on slowing MoM loans growth in Dec 2023 from frontloading, we saw overall MoM applications declining sharply across all fronts. That said, we still saw an 8% YoY increase mostly on the household side (+12%) driven again by greater mortgage applications. On the flipside, overall approval rates did see a dip in Nov 2023 at 51.1% (Oct 2023: 52.3%, Nov 2022: 56.4%) possibly from banks being more cautious as asset quality dilution risks could materialise from the seasonal influx, similar to recent Hari Raya trends (refer to Tables 4−5 for breakdown of system loan applications).

GIL unworrying. Speaking of asset quality, Nov 2023 GIL reported at 1.69% (Oct 2023: 1.70%, Nov 2022: 1.72%) which is also the lowest level YTD. This could be thanks to continued selective onboarding by the banks in lieu of navigating an industry loan loss coverage of below 100%, at 92.9% (Oct 2023: 91.3%, Nov 2022: 98.1%). While most banks had reflected some writebacks over the past several months, recessionary concerns may lead towards some topping up of provisions in the future (refer to Tables 6−7 for breakdown of system impaired loans).

Deposits bulking. System deposits grew by 5.3% YoY, so far in line with our CY23 deposits growth target of 5.0%-5.5% driven by year-end seasonal rates offered by banks to lock in liquidity. CASA stayed relatively stable at 28.4% (Oct 2023: 28.3%, Nov 2022: 29.5%) but may come off in Dec 2023 when fixed deposit products become more attractive.

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.

Our sector top picks for 1QCY24 are CIMB as our large cap favourite as we anticipate its regional portfolios to provide better sustainable returns in the near-term, with several outfits looking to break even soon. We also like AMBANK as its plausible consolidation angle is validated by its rejuvenated earnings with an anticipated knee-jerk interest following an upcoming tax credit gain in 1QCY24. As for small cap banks, ABMB remains our favourite for its solid fundamentals which are comparable to its large cap peers. Additionally, its leading CASA level may provide the group nimbleness to balance its interest margins with market share acquisition strategies.

Source: Kenanga Research - 2 Jan 2024