Aug 2024 system loans grew by 6.0% which was within our expectation of 5.5%-6.0% for CY24 where we anticipate further sequential easing in monthly growth rates to a higher base effect against 2HCY23. Household loans stay upheld by mortgage and hire purchase accounts whereas business loans will see support mostly from working capital, as we expect to see further inflows in line with stronger economic dynamics in 2HFY24. The deposits front continued to be uninspiring (+3.8%) as banks are likely hitting the brakes on customer acquisition to recalibrate interest margins, barring seasonal competition for termed products during the year-end. We hold a view for OPR to stay at 3% throughout CY24 and into CY25, which we believe by itself will be credited for further accumulation of banking stocks by foreign investors amid regional monetary policies being more dovish. In addition to sector valuations possibly seeking an upward re-rating in the near-term, our Top Picks are in the form of laggard, albeit high quality picks through: (i) PBBANK (OP; TP: RM5.10), (ii) HLBANK (OP; TP: RM27.40), and (iii) RHBBANK (OP; TP: RM7.55). We maintain our OVERWEIGHT call for the sector.

Preceding growth slower against a higher base. In Aug 2024, system loans grew by 6.0% YoY which is within our projected 5.5%-6.0% target for CY24. It reflected some moderation on a preceding basis with Jun and Jul 2024 previously, showing 6.4% and 6.3% YoY growth, respectively, as industry loans base had picked up on the latter half of CY23. On YTD basis, 8MCY24 would have registered only 3.0% growth with meaningful gains to come in 4QCY24 from the roll-out of investments and largescale projects.

Household loans (+6.4%) were upheld by continued momentum in mortgages (+7.0%) and hire purchase (+7.5%) while business loans (+5.4%) remained healthy, thanks to higher working capital needs, with service sectors making up most of the growth. On a MoM-basis, we noted a decline of business loans by 0.2% perhaps owing to the maturity of short-term business loans by service sectors to capitalise on the seasonally tighter 1H period. (refer to Tables 1−3 for breakdown of system loans).

Loan applications awaiting processing. Following the previous month’s lumpy inflow, Aug 2024 saw new household loan applications declining by 7% MoM. However, business loans instead picked up by 2% from the loading up of new working capital funds, tying into the abovementioned maturity. General approval ratings are showing a slight decline at 51.7% (Jul 2024: 52.5%, Aug 2023: 52.6%) which is below the one-year average of 53%. We relate this to the banks’ conscious efforts to optimise margins, supported by higher volume growth seen in the first half (refer to Tables 4−5 for breakdown of system loan applications and approvals).

GIL a non-concern. Industry GIL floats at 1.58% (Jul 2024: 1.58%, Aug 2023: 1.78%) as delinquencies stay well contained amid stronger economic and income prospects. We continue to see loan loss coverage being utilised, now standing at 90.5% (Jul 2024: 91.8%, Aug 2023: 90.6%) as banks free up their remaining provisions. For the moment, there does not appear to be any noticeable shift in GIL following the removal of diesel subsidies for businesses since 10 June 2024 (refer to Tables 6−7 for breakdown of system impaired loans).

Deposit dilution persists. Aug 2024 deposits grew by 3.8% YoY but declined by 0.4% MoM to uplift industry loan-to-deposit ratio to 88.0% (Jul 2024: 87.5%, Aug 2023: 86.1%). The banks have perhaps sought to reduce efforts in deposits growth as they work towards more selective efforts to shore up funds. We also noted that CASA ratio remained relatively stable at 28.5% (Jul 2024: 28.4%, Aug 2023: 28.3%) but will likely reduce during the year-end of seasonal fixed deposit replenishment competition.

Maintain OVERWEIGHT on the banking sector. With reference to our concurrent 4QCY24 Strategy report, “Eyeing One More Leg Up”, we anticipate interest within the sector to remain strong with support from: (i) further foreign inflows thanks to more stable monetary policy stance by BNM against regional markets, and (ii) appreciation in sector ROE/PBVs which were less generous during the past two-year horizon.

With regards to our Top Picks, we prefer to call out laggards as they are expected to do well given the above, being: (i) PBBANK, (ii) HLBANK and (iii) RHBBANK. With regards to PBBANK and HLBANK, their leading asset quality (GIL <1.0%) offer firm cushion against the potential degradation in the industry as risk appetite expands with better economic prospects. Meanwhile, RHBBANK offers leading dividend yields (c.7%) which could attract yield seekers in spite of modest loans growth targets (4%-5%), suggesting the possibility of greater upside should they be able to leverage of the same wider economic growth.

Source: Kenanga Research - 2 Oct 2024