• Top Picks (in order of preference): CIMB, AMMB, Public Bank, Hong Leong Bank and Alliance Bank. Bank Negara Malaysia’s Jun 2024 banking system statistics provided a sneak peek of the upcoming reporting season. Key highlights include faster loan vs deposit growth, stable interest spreads, and resilient asset quality. We continue to prefer banks with decent earnings prospects and a strong capital management theme, ie CIMB and AMMB.

• System loans grew 6.4% YoY (+1.2% QoQ, +0.8% MoM) in Jun 2024, led by the household (+6% YoY, +1% QoQ, +1% MoM), finance (+19% YoY, +4% QoQ, +3% MoM) and wholesale & retail trade (+11% YoY, +2% QoQ, +2% MoM) segments. On the flip side, loans to the utilities sector saw a 15% YoY decrease (-10% QoQ, +1% MoM) but, on the whole, business loan growth accelerated to 6.4% YoY (+1% QoQ, +1% MoM) after a rather sluggish start to the year – now growing on par with the system trend. YTD, loans have grown at an annualised 5.0%, ie tracking our 5-5.5% YoY forecast for 2024.

• Are applications and approvals pointing toward a softer 2H24? We note that YTD system loan applications are up 4% YoY – loan applications from businesses grew at a faster clip of 4% vs the 3% from the household segment. Loan approvals also exhibited the same trend, with business loan approvals up 4% while household approvals rose by 2% in the same period. This lends further weight to our expectation of loan growth potentially slowing down in 2H24, as households still form the bulk of the banking system (c.59%).

• Flat NIM in 2Q24? System average lending rate or ALR shrank by 3bps MoM to 5.32% (-5bps QoQ, -12bps YoY), but this was matched by a 3bps MoM reduction in the 12-month fixed deposit rate (-6bps QoQ, -10bps YoY). The average interest spread in 2Q24 appears flat YoY and QoQ, so we think sector NIM could be flat-to-slightly-better in the upcoming reporting season. From meetings with the banks, we gather that competition for loan rates has been stiff, but the banks have also been diligently cutting (board and promotional) deposit rates to provide some support to NIM and bottomlines.

• Asset quality holding up well. System GIL dipped by 1% YoY (flat QoQ, -1% MoM), with improvements seen in the agriculture (-72% YoY, +1% QoQ, flat MoM) and manufacturing (-13% YoY, -3% QoQ, -5% MoM) sectors. We also note that household GILs dropped by 3% YoY (-4% QoQ, -2% MoM). As a result, the system GIL ratio declined to 1.60%, from 1.71% in the previous year (Mar 2024: 1.62%, May 2024: 1.63%), while the LLC improved MoM to 91.7% (Jun 2023: 94.1%, Mar 2024: 92.1%, May 2024: 90.8%).

• Other highlights. System deposits grew 5% YoY (flat QoQ and MoM), at a softer clip vs loan growth over the same period. The slightly tighter LDR (+1.2ppts YoY), we think, could be part of the banks’ asset-liability management strategies to safeguard NIM. Elsewhere, capital ratios appear adequate – the CET-1 and total capital ratios have been largely stable since Jan 2023 at 14-15% and 18-19%.

Source: RHB Securities Research - 1 Aug 2024