Dec 2023 system loans increased by 5.3%, surpassing our 4.0%-4.5% expectation, thanks to strong MoM influx of working capital loans. While this may be due to further frontloading to meet a relatively later CNY season, as seen by a spike in applications. Industry GIL remained light at 1.65% and is expected to remain at these levels which are pre-pandemic levels. Deposit growth was also slightly above expectations at 5.6% (from our anticipated 5.0%-5.5%) with CASA levels likely to widen in the near term to fuel festive spending. We expect OPR to remain at a steady state of 3.0% till end-CY24, with any changes likely to be downside biased concurrently with regional monetary policies. We maintain our OVERWEIGHT call on the sector, with its resilience to be emboldened by better economic prospects fuelled by infrastructure projects and investments. For 1QCY24, we highlight: (i) MAYBANK (OP; TP: RM9.95) for its strong dividend proposition (c.7%) with its market leader positioning likely to tap into the abovementioned economic drivers, (ii) AMBANK (OP; TP: RM4.80) for its 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.

Closing with a bang. In Dec 2023, system loans grew by 5.3% YoY which beat our CY23 expectation of 4.0%-4.5% where we had expected slower MoM lending but it came in at +1.1% MoM. The surprise was led by an influx on business loans (+1.8%, mainly for working capital) which could be concentrated towards financial services and retail industries. On the other hand, household loans grew +0.6% MoM with residential property being the largest growth component. With a strong momentum closing up CY23, we opine conditions may be more favourable for borrowing with OPR expected to remain stable and may open room for more competitive financing rates. We project CY24 loans growth range between 5.5%-6.0% (refer to Tables 1−3 for breakdown of system loans).

Applications flowing in. On a YoY basis, Dec 2023 applications rose by 30% with similar support from both household and business loans, which we warrant could be a result of a later CNY season in Feb 2024 (as compared to 2023’s Jan celebration). This is backed by a +6% MoM growth (Nov 2023: -19% MoM) but with households (+12%) seemingly loading up on personal loans, possibly for festive spending (refer to Tables 4−5 for breakdown of system loan applications).

Narrowing GIL trends. We continue to see industry GIL reporting sequential improvement at 1.65% (Nov 2023: 1.69%, Dec 2022: 1.72%). We also see industry loan loss coverage lingered at 92.0% (Nov 2023: 92.9%, Dec 2022: 98.3%) which could serve as a sweet spot for in the industry as concerns of pandemic-related delinquencies dissolve. We note that pre-pandemic loan loss coverage typically averages between 90%-100%. While most banks have reflected some writebacks over the past few months, larger cap banks still possess substantial buffers which may further dilute industry readings should they finally decide to net out their provisions (refer to Tables 6−7 for breakdown of system impaired loans).

Seasonal deposits flowing in. System deposits grew by 5.6% YoY, which is slightly above our CY23 deposits growth target of 5.0%-5.5%, resulting from a strong 1.3% MoM typical of the year-end season as banks offer highly competitive deposit rates to secure cheaper funding costs. CASA stayed relatively stable at 28.5% (Nov 2023: 28.4%, Dec 2022: 29.0%) which we suspect may extend in the coming months in lieu of upcoming festive spending.

Maintain OVERWEIGHT on the banking sector. We believe the banking sector will continue to show resilience based on a stronger economic backbone, with CY24 expected to be supported by the roll-out of public infrastructure projects with foreign investors renewing interest. On the flipside, household spending may be pinched by tax reforms and the progressive implementation of targeted fuel subsidies. That said, we expect BNM to be cognisant of these factors and may keep OPR stable throughout CY24 to keep overall activities intact, with higher possibility of downside adjustment in line with the anticipated softening of monetary policies from leading markets.

Our sector top picks for 1QCY24 is 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. We bring attention to MAYBANK for its sustainable and leading dividend returns amongst the large cap banks (c.7%). Being the leading bank in terms of market share, MAYBANK could also be viewed as the best beneficiary for stronger economic activity. 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 Feb 2024