• Maintain OVERWEIGHT, sector Top Picks: CIMB, AMMB and Alliance Bank Malaysia. Despite the 25bps Overnight Policy Rate (OPR) hike in early July, demand for financing continued to trend upwards, with system loan applications growing 4.5% MoM in July. System loan growth remained robust, and is tracking our 2022 forecast well. We maintain our upbeat stance on banks, as healthy loans growth coupled with NIM expansion (fuelled by OPR hikes) should bode well for the sector.

• System loans grew 5.9% YoY (MoM: +0.3%), bringing 7M22 annualised growth to 5.2% YoY. In particular, momentum was seen in loans to the household (+6.1% YoY, +0.4% MoM) and the wholesale & retail trade (+13.6% YoY, +1.9% MoM) segments, offset slightly by a decline in construction loans (-2.9% YoY, -0.2% MoM). Elsewhere, credit card outstanding debts surged 16.1% YoY (MoM: +2.0%) on the back of sustained economic activity. We raise our system loans growth forecast to 5.5% (from 5.1%), in tandem with the upward revision in RHB economists’ 2022 real GDP growth to 6.0% from 5.3%.

• Lending rates on the rise. Following the 25bps OPR hike on 6 Jul, lending rates have also begun to creep upwards. The average lending rate (ALR) ticked up by 30bps MoM to 4.09%, with the base lending rate adding 24bps MoM to 5.97%. Deposit rates were also lifted, with the 12-month fixed deposit rate rising to 2.20% (Jun 22: 1.95%) while the 3-month rate rose to 2.01% (Jun 22: 1.79%). Our house view is for the central bank to lift the OPR by another 25bps to 2.50% before the year-end.

• Business loan applications unbothered by rate hikes. System loan applications increased 4.5% MoM (YoY: +79.8%) despite the 25bps policy rate hike. Specifically, applications from businesses grew 26.2% MoM (YoY: 87.9%). However, the appetite from households has begun to waver, leading to 10.1% lower applications MoM (-10.1%) from this segment (YoY: +72.8%). With inflationary pressures mounting, banks seem to have turned more cautious, as loan approvals and disbursements were down 5.5% and 8.1% MoM (YoY: +77.1% and +25.7%).

• CASA deposits less favourable now. Depositors have begun to move away from CASA deposits and towards fixed deposits, presumably to capitalise on increased longer-term deposit rates. As such, fixed deposits added 1.1% MoM (YoY: +3.5%), while CASA deposits shrank 1.4% MoM (YoY: +6.7%). Overall, total deposits stayed flat MoM (YoY: +7.8%), with system LDR at 86.8% (Jun 22: 86.9%, Jul 21: 88.9%).

• Asset quality remains resilient. System GILs grew by 7.9% YoY (MoM: +3.5%) with the construction (+35.8% YoY, +15.6% MoM) and household (+5.2% YoY, +3.5% MoM) segments being the biggest contributors. Consequently, LLC dropped to 96.5% at end-July from 100% in June, but remains above the pre-pandemic levels of 80-95%. System capital ratios remain robust, particularly the CET-1 ratio of 14.6%, which should provide the banks with ample breathing room.

Source: RHB Research - 5 Sep 2022