• Maintain OVERWEIGHT; Top Picks: CIMB and Hong Leong Bank. Bank Negara Malaysia’s (BNM) banking sector statistics for Jul 2023 showed a marginal downtick in YoY loan growth to 4.2%, but momentum for lending indicators improved MoM despite a higher average lending rate. System CASA ratio dipped slightly, as fixed deposits (FD) continued to drive deposit growth. We maintain our sector weighting, but pare down our 2023 system loan growth forecast to 4-4.5%, from 5%.

• System loans rose 4.2% YoY (MoM: +0.2%) in July, with steady growth across most loan purposes, barring construction (-1% YoY, flat MoM) and purchase of securities (-8% YoY, flat MoM). Both household (+5% YoY, +1% MoM) and non-household (+2% YoY, flat MoM) loans grew steadily to levels equal to that of the previous month. However, on a YTD basis, system loans only grew 1.6% (annualised: +2.7%). Given the lower-than-expected figures and RHB economists’ recent downward revision of the real GDP growth forecast to 4.3% from 5%, we reduce our system loan growth forecast to 4-4.5% from 5%.

• Stable lending indicators. The average lending rate has ticked upwards by 2bps MoM to 5.46% (YTD: +45 bps) – a level last reached in 2009. However, lending indicators remained encouraging, with system loan applications up by 2.4% YoY (+5.9% MoM) on a 3-month-moving average (3MMA) basis, and loan approvals growing by 2.7% YoY (+6.2% MoM). Similarly, loan disbursements improved 5.4% YoY (+3% MoM).

• System deposits grew 5.3% YoY (-0.5% MoM), which outpaced loan growth during the same period. This was still driven by FD which grew 8.6% YoY (flat MoM) while CASA contracted by 4.2% YoY (-1.4% MoM). As a result, system CASA ratio dropped slightly MoM to 30.4% (Jun 2023: 30.7%, Jul 2022: 32.8%) albeit still above the pre-pandemic average of 25- 27%. The 12-month FD rate has remained constant MoM at 2.89%, after hitting a peak of 2.9% in May.

• Asset quality still sound. System GILs remained largely flat (+0.6% MoM, -0.5% YoY), with the sharp 13.2% YoY increase in residential properties offset by decreases for loans for other purposes such as construction (-42.7% YoY) and transport vehicles (-1.6% YoY). System GIL ratio stayed at 1.76% in July (Jun 2023: 1.76%, Jul 2022: 1.85%) but system LLC dropped slightly to 91.5%, from 91.8% in June (Jul 2022: 96.5%).

• Other highlights. The banking system remains healthy, with sufficient capital buffers. LDR, liquidity coverage ratio, and CET-1 stood at 86.1%, 155%, and 15.1% as of Jul 2023. For the SME segment, loans grew 6% YoY (+1% MoM), mostly driven by the retail (+9% YoY, 1% MoM) and finance (+5% YoY, +1% MoM) sectors. The SME GIL ratio ticked up slightly to 3.03% in June (May 2023: 2.93%, Jun 2022: 3.01%).

Source: RHB Securities Research - 1 Sept 2023