June 2024 system loans grew by 6.5% but with the view of possible easing in the 2HCY24 period; we believe this to still fall within our expected close of 5.5%-6.0% for CY24. On that note, we did see business loans reported stronger sequential numbers on pent-up working capital needs postfestive seasonality, particularly for service industries. Meanwhile, deposit readings (+4.9%) remained more modest as appetite to spend may still be healthy.

We anticipate OPR to remain at 3% throughout CY24, with any change likely to have a downside bias. 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 3QCY24, we pick: (i) CIMB (OP; TP: RM7.60) for its newly sustained growth for greater ROE and dividend yield offerings to shareholders, (ii) RHBBANK (OP; TP: RM7.25) for its leading dividend prospects, and (iii) ABMB (OP; TP: RM4.60) as a small cap favourite given its largely comparable fundamentals which beats certain large caps.

Fronted by service sectors. In June 2024, system loans grew by 6.5% YoY. For the time being, we deem this to be still within our projected 5.5%-6.0% target for CY24 on possible easing stemmed by inflation from fuel subsidy rationalisation. Household loans maintained its growth levels at 6.5% with more traction from transport vehicles and credit cards while business loans came in at 6.4% growth with service industries supporting the largest increments. This was more prevalent on a MoM basis which lifted business accounts by 1.3% while households only gained 0.5% MoM. We believe this could be due to SMEs and corporates making up for the slower festive cluttered months of the year and are now more aggressively loading up on capital. (refer to Tables 1−3 for breakdown of system loans).

Loan applications likely to pause. June 2024 applications increased by 2% YoY but solely on the back of more business loan applications as households appear to be flattish. While we could tie this to the abovementioned strength in service sectors, we note that application readings declined by 12% MoM which could indicate that past levels could have been a bottleneck, supporting our expectation of possible easing in the coming months. (refer to Tables 4−5 for breakdown of system loan applications).

More green in GIL numbers. Industry GIL improved slightly to 1.60% (May 2024: 1.63%, June 2023: 1.76%) as we believe repayment habits have normalised post-festive considerations. There also appears to be an increase in industry loan loss coverage to 91.7% (May 2024: 90.8%, June 2023: 91.8%) from reversals of non-performing loans acting to overstate the level of provisions required. (refer to Tables 6−7 for breakdown of system impaired loans).

CASA relatively unchanged. June 2024 system deposits grew by 4.9% YoY but was flattish MoM as spending requirements had likely remained moderate. We also saw CASA levels remaining stable at 28.6% (May 2024: 28.5%, June 2023: 28.2%) amidst ongoing competition on fixed deposit products likely keeping depositors sticky, albeit on possibly lower yields as compared to prior periods. With loans growth continuing to lead, industry loans-to-deposits ratio came in at 86.8% during the month (May 2024: 86.1%, June 2023: 85.5%).

Maintain OVERWEIGHT on the banking sector. Market tailwinds, such as ongoing loan growth and GDP improvement along with better margin retention, are anticipated to continue overshadowing industry headwinds like inflationary pressures and a weaker MYR. We believe this will likely result in fewer challenges to the sector's resilience. The sector remains appealing due to attractive dividend yields (6%-7%) on most stocks, coupled with lower inherent sector volatility compared to other industries. Significant share price movements have been observed with the influx of foreign investors aiming to acquire major sector stocks.

Our sector top picks for 3QCY24 include CIMB which has been able to reach new grounds in its ROE at c.11% which the group looks to sustain into the long term thanks to strengthening presence in both home and regional markets. Additionally, its dividend yield is creeping well into the mid-6% levels at current price points, which is the highest amongst the top three banks. RHBBANK is also favoured for its dividends which we project to be the leader (7%-8%) amongst its peers. Meanwhile, its associate Boost Bank may soon enter the public domain which could garner greater interest in the near-term. 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 Aug 2024