• Maintain OVERWEIGHT, Top Picks: CIMB, AMMB and Alliance Bank Malaysia. System loans continued to chart robust growth, and increased by 6.8% YoY in August – which tracks our full-year forecast. Asset quality improved slightly MoM, with a marginally lower GIL ratio and higher LLC ratio being key highlights. Our sector outlook remains positive, as interest rate hikes coupled with well-managed asset quality will be a net positive for earnings growth.

• System loans grew 6.8% YoY (MoM: +0.7%) in Aug 2022. Specifically, we saw strength in the household (+6.5% YoY, +0.5% MoM) and wholesale & retail trade (+13.5% YoY, +0.5% MoM) sectors, which was slightly offset by a decline in loans to the agriculture sector (-5.2% YoY, -0.6% MoM). Elsewhere, loans for residential mortgages (+7.5% YoY, +0.5% MoM) and working capital (+9.4% YoY, +1.9% MoM) also increased. At an 8M22 annualised rate of 5.7%, system loans growth is tracking our 2022 forecast well, and we leave our estimate unchanged, at +5.5% YoY.

• Lending indicators. System loan applications slipped 1.8% MoM (YoY: +51.7%) as the average lending rate (ALR) added a further 14bps MoM to land at 4.24% at end-August. In particular, businesses applied for 11% less loans MoM, but applications from households rose 6.6% in the same period. However, we observed higher system loan approvals and disbursements, by 21% and 5% MoM (YoY: +81% and +36%), which could point towards the banks’ positive outlook on the wider economy.

• Asset quality improved marginally. System GIL ratio improved by 1bp MoM to 1.84%, despite the 0.2% MoM uptick in system GILs. GILs increased in the construction (+2.2% MoM, +37.8% YoY) and wholesale & retail trade (+4.8% MoM, +11.9% YoY) sectors, but this was slightly mitigated by a shrinkage in household GILs (-2.6% MoM, +1.6% YoY). With the LLC at a higher 97.3% (against 96.5% in July), we opine that asset quality remains resilient for now.

• CASA deposits continued on a downtrend. CASA deposits in Aug 2022 contracted by 0.3% MoM (YoY: +6.1%), marking the second consecutive month of negative growth. On the other hand, fixed deposits (FD) gained 0.7% MoM (YoY: +5.0%), likely due to depositors wanting to capitalise on higher FD rates. While the CASA ratio has shed 1.3ppts since the first Overnight Policy Rate hike in May, the Aug 2022 level of 41.8% is still above the pre-pandemic average of <40%.

• SME loans grew 5.9% YoY (MoM: +0.5%) in August, driven by loans to the manufacturing (+7.6% YoY, +2.4% MoM) and wholesale & retail trade (+13.5% YoY, +1.1% MoM) sectors. Pressure on SME asset quality seems to be rising, with the SME GIL ratio up to 2.97% from 2.73% in the previous year (Jul 2022: 2.92%). However, we believe that this is within expectations, given the expiry of certain loan repayment assistance programmes. Moving forward, banks will continue to provide support for SMEs – especially those that are still recovering from the negative effects of the pandemic.

Source: RHB Research - 3 Oct 2022