Sep 2024 system loans grew by 5.6% (YTD: +3.4%) which was within our expectation of 5.5%-6.0% for CY24 with a higher base effect expected to kick in against a strong 2HCY23. Supporting this year's close continues to be sustained mortgage demand and the return of service industries with heavy working capital needs. Meanwhile, deposit growth of 3.3% disappointed our 5.0%-6.0% expectation which we believe will not see significant upside towards the year-end as liquidity in the banks remains ample (LLC: 148.0%). We still ascribe some benefit in the form of year-end fixed deposit seasonalities, with a revised deposits target of 3.5%-4.0% for CY24.

We hold a view for OPR to stay at 3.00% throughout CY24 and into CY25, which we believe by itself will be credited towards further accumulation of banking stocks by foreign investors amid regional monetary policies being more dovish. However, softness in the market could be tied to policy uncertainties from the upcoming US Election. We advocate our Top Picks which command high safety and quality through: (i) PBBANK (OP; TP: RM5.10) and (ii) HLBANK (OP; TP: RM27.40); while (iii) RHBBANK (OP; TP: RM7.55) stands to provide the highest dividend returns (c.7%). We maintain our OVERWEIGHT call for the sector.

Modest growth persists. In Sep 2024, system loans grew by 5.6% YoY which is within our 5.5%-6.0% target for CY24 as we approach a higher year-end base. Household loans maintained strength (+6.3%) with mortgages (+7.3%) and hire purchase (+9.4%) making up the lion's share while business loans (+4.6%) were held by greater financing needs in the financial service industry (+14.3%). On a MoM basis, trends were similarly reflected in household (+0.5%) and business (+0.3%) albeit with the latter providing more support from logistics segments, likely in anticipation of heavier business activities between the year-end and early-year seasonalities. (refer to Tables 1−3 for breakdown of system loans).

Loan applications still soft, declining by 5% YoY and 9% MoM which we reckon was frontloaded during the prior months. We saw mortgage applications declining by 1% YoY but saw greater interest in other personal consumption categories (i.e. hire purchase, personal use, credit cards). We note that Sep 2024's higher approval rating of business accounts at 65.2% (Aug 2024: 60.0%, Sep 2023: 60.1%) is pegged by a healthier operating climate with demand-side risks subsiding. However, the opposite is seen for household loan approvals at 42.6% (Aug 2024: 45.2%, Sep 2023: 45.4%) largely arising from lower property approval rates strained by banks tightening credit screening as a means to lower their exposure to riskier but lower margin mortgage accounts. (refer to Tables 4−5 for breakdown of system loan applications and approvals).

GIL continues to dilute. Industry GIL saw further improvement to 1.54% (Aug 2024: 1.58%, Sep 2023: 1.72%) and is close to forming a 4-year low for the industry. Though writebacks have been progressive, we opine that banks will continue to balance their risk mitigation strategies with industry LLC inching slightly up to 90.8% (Aug 2024: 90.5%, Sep 2023: 91.6%). There has yet to be any meaningful stress signals emerging from the removal of diesel subsidies for businesses since its implementation on 10 June 2024 (refer to Tables 6−7 for breakdown of system impaired loans).

Lukewarm deposits reading. Sep 2024 deposits grew by 3.3% YoY with a 0.8% MoM increase, likely spurred by a return to retail CASA. Overall industry CASA mix level came at 28.6% (Aug 2024: 28.5%, Sep 2023: 28.1%) with LDR able to ease slightly to 87.7% (Aug 2024: 88.0%, Sep 2023: 85.7%). All said, its overall performance is far below our expected 5.0%-6.0% as banks continue to sit on highly ample liquidity with industry LCR reporting at 148.0% (Aug 2024: 145.4%, Sep 2023: 151.1%).

This prompts us to revise towards a more modest target of 3.5%-4.0% to end CY24, with year-end fixed deposit seasonality still expected.

Reflecting on 3QCY24 statistics, we believe our current expectations for the banking stocks within our coverage are sufficiently reflected, with domestic loans growth YoY dominated by large cap banks (1HFY24: MAYBANK +7.9%, CIMB +5.6%, PBBANK +6.0%) and will continue to do so in the upcoming 3QFY24 reporting season. In line with the higher base effect seen, 9M-YTD growth should also taper down in addition to the banks advocating profitability as opposed to market share gain. Picky loan approvals and suppressed deposits growth (to contain funding costs) are well seen in this reporting. That said, depreciating USD rates may also underpin liability management strategies for the banks, making the balancing of deposit rates more urgent.

Still, there should be some relief in NOII as trading activities, wealth management fees and brokerage income pick up amid strong investment markets.

Maintain OVERWEIGHT on the banking sector. Despite the recent run-up in banking stocks, we believe appreciation for banks will be sustained, led by stable central bank rates amid cuts in regional peers. Our in-house view for OPR stands at 3.00% throughout CY25 at the moment. While there is some reservation to investors in lieu of the outcome of the upcoming US Election, we opine foreign investors will continue to eye Malaysian banks as a proxy to country's re-emerging economic prospects relative to other emerging markets. Our Top Picks for the sector remains: (i) PBBANK and (ii) HLBANK which command stellar asset quality (GIL<1.0%) offering cushion against potential degradation in the industry should economic prospects make an unfavourable turn. Meanwhile, RHBBANK offers leading dividend yields (c.7%) could attract yield seekers in spite of modest loans growth targets (4%-5%).

Source: Kenanga Research - 1 Nov 2024