• Maintain OVERWEIGHT; Top Picks: Malayan Banking, Hong Leong Bank, and CIMB. Bank Negara Malaysia’s (BNM) banking sector statistics for Jun 2023 showed healthy growth in loans at 4.4% YoY, but lending indicators are softer with a YoY decline in loan applications and approvals, partly due to the high base effect from last year. Nevertheless, we maintain our call on the sector premised on the banks’ healthy earnings and dividend growth, and a potential NIM recovery in 2H23.

• System loans rose 4.4% YoY (MoM: +0.2%) in Jun 2023, mainly driven by mortgages (+7% YoY, +1% MoM), hire purchase (+9% YoY, + 1% MoM), and working capital (+2% YoY, -1% MoM). Both household (+5% YoY, +1% MoM) and non-household (+3% YoY, flat MoM) continued to grow steadily. Loans in the finance (+12% YoY, -1% MoM) and retail (+4% YoY, +1% MoM) sectors more than offset the YoY decline in loans from manufacturing (-4% YoY, +1% MoM) and utilities (-5% YoY, -1% MoM). Overall, we reiterate our 2023 system loans growth forecast of c.5% YoY.

• Softer loan leading indicators MoM but YTD still healthy. The average lending rate has ticked upwards by 5bps MoM to 5.44% (YTD: +43 bps), slightly slower than the 13bps MoM increase in May 2023 following the increase in overnight policy rate (OPR) that month. While system loan applications declined by 9% YoY (high base in Jun 2022), on a 3-month- moving average (3MMA), loan applications remained steady with a 0.7% growth YoY (-5.4% MoM). Loan approvals on a 3MMA basis fell slightly by 0.6% YoY (-4.9% MoM), and loan disbursements stayed flat YoY (-1.5% MoM). That said, on a YTD basis, loan approvals were up 9% vs 1H22, which we believe will be supportive of loan growth ahead.

• System deposits grew 6% YoY (flat MoM), outpacing loans growth during the same period, driven by a 10% YoY increase in fixed deposits (FD) (flat MoM). CASA fell by 4% YoY, but grew 1% MoM. This led to a slight increase in the system CASA ratio MoM to 30.7% (May 2023: 30.3%, Jun 2022: 33.3%). This remained above the pre-pandemic average of 25-27%.

• Asset quality still sound. System GILs dropped 2% MoM (+1% YoY), led by lower GIL relating to working capital (-4% MoM, +5% YoY) and personal use (-4% MoM, flat YoY), offsetting the increases in residential properties (+1% MoM, +12% YoY) and credit cards (+5% MoM, +38% YoY). As compared to Mar 2023, system GIL ticked up 1% QoQ – which suggests asset quality was stable QoQ. System LLC was 91.8% (May 2023: 93.2%, Jun 2022: 98.6%) and as compared to 1Q23: 95.9%.

• Other highlights. The banking system remained liquid and well-capitalised in Jun 2023 – LDR, liquidity coverage ratio, and CET-1 stood at 85.5%, 155% and 14.4%. SME loans grew 2% YoY in May 2023 (1% MoM), with most of the growth delivered by the retail (+9% YoY, +1% MoM) and transport & communication sectors (+9% YoY, flat MoM), while SME GIL ratio stood at 2.93% (Apr 2023: 2.91%, May 2022: 2.86%).

Source: RHB Research - 1 Aug 2023