• Maintain OVERWEIGHT, Top Picks: Hong Leong Bank, AMMB and Malayan Banking. The effect of the surprise 25bps OPR hike (on 11 May) was reflected in Bank Negara Malaysia’s (BNM) latest statistics. Fixed deposit rates rose by over 20bps, while the average lending rate added 12bps MoM to land at 3.68% at end-May. However, loan growth remained stable at 5% YoY (MoM: +0.3%), while deposits rose by 7.8% YoY (MoM: +0.2%). We tweak our 2022 system loans growth forecast to +5.1% from +5.2%, after factoring in the YTD performance.

• System loans grew 5% YoY (MoM: +0.3%), driven by loans to the household sector, which also grew by 5% YoY (MoM: +0.3%). Other sectors that drove growth include the wholesale & retail trade (+12.1% YoY, +0.5% MoM) and transport (+13.9% YoY, +1.0% MoM) sectors, while construction loans recorded a 5.9% YoY contraction (MoM: -0.1%). By purpose, loans for residential mortgages (+6.8% YoY, +0.4% MoM) and working capital (+6.7% YoY, +0.3% MoM) remained the biggest contributors to loan growth.

• Lending indicators. Loan approvals in Jan-May 2022 increased 19.5% YoY, which pointed to the banks’ increased optimism on business prospects. In particular, loan approvals to businesses gained 30.6% YoY during the period, while household approvals grew 12.6%. The strong pipeline for approvals leads us to believe that loan growth will be sustained at 5.1% YoY in 2022, notwithstanding the expected moderation in 2H22.

• 25bps Overnight Policy Rate (OPR) hike effect. On a MoM basis, system loan applications in May dipped 10%, likely due to the increase in the average lending rate to 3.68% from 3.56% in the previous month. On the other hand, the 21-24bps increase in fixed deposit rates saw fixed deposits ticking up by 0.6% MoM. However, this may have been at the expense of CASA deposits, which contracted 1.3% MoM. As a result, while system LDR was maintained at 86.8%, the sector’s CASA ratio shrunk to 42.6% from 43.1% at end-April.

• Asset quality. System GILs increased 8.3% YoY (MoM: +4.7%), led by higher impairments on residential mortgages (+12.4% YoY, +5.3% MoM) and construction loans (+11.2% YoY, +5.9% MoM). GIL ratio rose to 1.64%, vs 1.57% in April. However, the increase in GILs is expected, owing to the expiry of certain relief assistance programmes. Overall, asset quality remains sound, with system LLC at 109.1% vs pre-pandemic levels of under 100%.

• SME loans grew 7% YoY (MoM: -0.2%). Growth was primarily driven by the wholesale & retail trade sector – which was up 10.2% YoY (MoM: -0.2%). Elsewhere, loans for working capital purposes also recorded a strong increase of 9.1% YoY (MoM: -1.0%). In Jan-Apr 2022, SME loans grew 1.5%, or by an annualised +4.6%.

Source: RHB Research - 1 Jul 2022