Oct 2024 system loans grew by 6.0% (YTD: +4.1%) which is at the lower end of our expectation of 5.5%-6.0% for CY24 with a higher base effect expected to kick in against a strong 2HCY23.

Financial services and working capital purposes continued to lead the pack, with our expectations that banks may continue to adopt more targeted approvals going forward to retain its low GIL ratio 1.53%. Deposits still appear weak at 3.1% YoY growth (+1.4% YTD), which we believe will be made up for by year-end fixed deposit seasonalities, with a 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. While investor preferences may move away from Malaysian banks to foreign markets amid possibly monetary policy shake-ups in the US, we still take comfort that the reported banks' earnings have been strong during the recent 3QCY24 earnings season. Pending review into 1QCY25, we keep our 4QCY24 Top Picks of: (i) PBBANK (OP; TP: RM5.10) and (ii) HLBANK (OP; TP: RM27.40) for asset quality safety; and (iii) RHBBANK (OP; TP: RM7.55) for highest dividend returns (c.6%) despite its share price rally, for now. We maintain our OVERWEIGHT call for the sector.

Year-end season approaching. In Oct 2024, system loans grew by 6.0% YoY (+4.1% YTD) which is within our 5.5%-6.0% target for CY24 as we approach a higher year-end base. Household loans kept the lead at +6.2% thanks to key segments of residential mortgages (+7.1%) and hire purchase (+9.1%). Meanwhile, business loans grew by 5.7% with support driven by the financial service sectors (+18.0%) and general working capital purposes. On a MoM basis, we saw business loans growth outpaced household at 0.8% and 0.6%, respectively. We anticipate business loans to pick up, typical during the year-end in preparation of heightened festive spending during Christmas and CNY seasonalities. (refer to Tables 1−3 for breakdown of system loans).

Applications flowing through. As mentioned above, loan applications shot up by 14% on a MoM basis on the back of higher business loan applications (+17%). While this did not translate to any meaningful increase in YoY application, we note that monthly application levels are near its all-time high, only second to Jul 2024's pent-up residential mortgage surge. That said, approval levels remain tight at 53.3% (Sep 2024: 53.8%, Oct 2023: 55.2%) as banks stay cautious of asset quality leakages. (refer to Tables 4−5 for breakdown of system loan applications and approvals).

These stricter approaches could have been what kept industry GIL to push new standards at 1.53% (Sep 2024: 1.54%, Oct 2023: 1.70%). The lowest since the industry reported this level of GIL in a pre-pandemic period was Dec 2019 at 1.51% as opposed to a peak of 1.83% in Nov 2022. As write-backs are becoming less common as overlays are exhausted, banks appear to still be consciously beefing up on provisions a seen in LLC picking up at 91.2% (Sep 2024: 90.8%, Oct 2023: 91.3%). 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).

Slower pace in deposit books. Oct 2024 deposits growth of 3.1% YoY (+0.3% MoM, +1.4% YTD) marks a new low in this space. We believe that prior year numbers were boosted by OPR adjustments and distorted funding cost dynamics then, leading to depositors parking more heavily into long-term deposits, whereas the opposite is true now that OPR had remained stable. As we continue to consider year-end deposits promotion to drive the segment in the coming months, it may not do any favours to the currently muted CASA ratio of 28.4% (Sep 2024: 28.6%, Oct 2023: 28.3%). All considered, industry LCR still appears ample at 146.8% (Sep 2024: 146.6%, Oct 2023: 150.8%).

Maintain OVERWEIGHT on the banking sector. Post results, the banking sector continues to see support from investors as earnings came in relatively intact for the larger cap names. While we await several banks iron out their upcoming strategies for 2025, we believe it could be more expansionary in nature on the loans front as a lot of efforts were previously focused in sustaining NIMs. Our in-house view for OPR stands at 3% throughout CY25 at the moment.

Pending further review into 1QCY25's investment strategy for the sector, our current 4QCY24 Top Picks for the sector are: (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's leading dividend yields (c.6%) could attract yield seekers in spite of modest loans growth targets (4%-5%).

Source: Kenanga Research - 2 Dec 2024