TA Sector Research

Banking Sector - 2024 Loan Forecast Revised Higher to 5.8%

Publish date: Mon, 05 Feb 2024, 12:37 PM

Strong 2023 Finish Anchored by Business Loans

In 2023, loans and advances exhibited a robust growth trajectory, surpassing initial projections. Notably, data for December revealed a pronounced MoM acceleration, registering an uptick of 1.1%. Consequently, the YoY expansion reached an impressive 5.3%, outpacing our earlier forecast of 4.7%. The notable surge was predominantly attributable to the business segment, which experienced its most substantial MoM surge in two years, posting a noteworthy increase of 1.6%.

Overall, the total business loans rose at a stronger pace of 4.2% YoY in December (vs. 3.3% YoY in November and 1.4% YoY in October). By purpose, loans for Working Capital increased by 4.6% YoY (2022: +6.2% YoY). By segment, loans for Agriculture, Forestry & Fishing, Electricity, Gas, Steam & Air, Construction, Accommodation & Food Services, and Information & Communication continued to decline by 4.4%, 13.4%, 1.1%, 2.3% and 0.3% YoY, respectively.

Meanwhile, loan growth in all other segments remained healthy, led by Education, Health and Others (9.8% YoY), Finance, Insurance, & Business Activities (8.1% YoY), Wholesale and Retail Trade (7.0% YoY), Transportation & Storage (6.8% YoY), Water Supply, Sewerage & Waste (4.3% YoY) and Manufacturing (+3.2% YoY). Loans for Mining & Quarrying rebounded to grow by 8.6% YoY (+4.9% MoM), having registered contractions since July 2022. Elsewhere, capital market activities decelerated towards the 4Q of the year as the net funds raised by the private sector through the issuance of new shares and debt securities in 2023 (excluding redemptions) declined to RM120.6bn (2022: RM153.2bn).

Steady Consumer Loans

Total consumer loans accelerated by 6.1% YoY (+0.7% MoM). Residential Mortgages, which account for a sizeable chunk (around 64%) of total consumer loans, continued to support growth in the segment, increasing at a more robust pace of 7.3% YoY (2022: +6.9% YoY). Loans for the purchase of passenger cars also climbed at a healthier rate of 9.2% YoY (2022: +7.3% YoY), while the yearly drawdowns for credit cards and loans for personal uses broadened by 10.8% YoY (2022: +14.9% YoY) and 5.8% YoY (2022: +2.8% YoY). However, drawdowns for the Purchase of Securities declined again by 12.3% YoY (2022: +3.2% YoY).

December Surge in Yearly Loan Applications and Approvals

Total loan applications surged by 30.1% YoY (+5.9% MoM). Consumer loan applications rose by 33.3% YoY (+15.4% MoM), while business loan applications increased by 25.1% YoY (-6.9% MoM). By sub-segment, loan applications for HP loans and Residential Properties widened by 20.5% YoY (-1.4% MoM) and 11.0% YoY (-2.2% MoM). Application for Personal Loans ballooned by >100% YoY and MoM, while the application for the Purchase of Securities jumped 93.0% YoY (+40.6% MoM). Meanwhile, applications for Credit Cards declined by 19.9% YoY (-8.7% MoM).

Total loans approved rose for the 4th month in December (+29.1% YoY, -4.3% MoM). The increase was led by healthier business loan approvals, which ballooned by 51.0% YoY (+0.4% MoM). Meanwhile, the total loans approved for consumer loans expanded by 9.6% YoY (-9.6% MoM). The overall approval rate stood at 50%, underpinned by business and consumer approval rates of 73% and 36%, respectively. By major sub-segments, approval rates for the purchase of Residential Properties, Non-Residential Properties, and HP loans slipped to 37% (2022: 41%), 50% (2022: 59%) and 59 (2022: 62%).

Slight Increase in Impaired Loans

The system's total impaired loans rose by 1.0% YoY (-1.1% MoM). By segment, consumerimpaired loans grew at a softer pace of 5.1% YoY (unchanged MoM), while the impaired loans for businesses declined by 2.4% YoY (-0.8% MoM). The ratio of net impaired loans to total gross loans for the system stood at 1.6%, little changed from 1.7% a year ago. Compared to a year ago, the GIL ratio for Residential and Non-Residential loans improved 10 and 20 bps to 1.3% and 1.6%, respectively. The GIL ratio for Credit cards was stable at 1.0%, while the GIL ratio for HP loans deteriorated by 10 bps to 0.5%. Elsewhere, the GIL ratio for some major business segments, such as Manufacturing and Construction, improved by 40 and 10 bps YoY to 2.0% and 4.6%, respectively, while Wholesale, Retail and Trade deteriorated by 70 bps YoY to 2.2%. By purpose, the GIL ratio for loans taken for Working capital was unchanged at 2.4% in December 2023.

Steady Growth in CASA Deposits, Average Lending Rates Slipped MoM

Total deposits (excluding repo) increased by 4.6% YoY (+1.5% MoM). Total CASA also steadily increased by 3.3% YoY (+1.8% MoM) in December. The CASA ratio stood at 31.0%. The system's liquidity coverage ratio (LCR) grew to 161% (151% in December 2022), while the loanto-fund ratio was at 81.8% (2022: 82.5%). Elsewhere, the average loan rate slipped to 5.45% in December 2023 from 5.48% last month but was higher than 4.87% in December 2022. Meanwhile, the banking system's capital buffers remained more than adequate, with a CET1 of 14.6% and a Total Capital Ratio of 18.2%.

2024 Loan Growth Forecast Revised Higher to 5.8%

Loans and advances demonstrated a more robust surge than anticipated in the 4Q. The resilience of the business segment primarily propelled the substantial upswing, while consumer loans maintained a stable and healthy trajectory. Looking ahead to 2024, we anticipate government-led initiatives to stimulate investments and revitalise the economy. Notably, construction and infrastructure activities are poised for a resurgence, driven by potential projects such as the MRT3, Penang LRT, Kuala Lumpur-Singapore high-speed rail, and 33 high-priority flood mitigation projects valued at RM11.8bn. Moreover, investments in renewable energy, aligned with the National Energy Transition Roadmap (NETR), are anticipated to invigorate domestic activities and attract foreign investments. Bolstered by more optimistic GDP and private investment projections, we are revising our growth forecast for business loans upward to 5.6% from the initial 4.2%.

Conversely, we have adjusted consumer loans downward to 5.9% from 6.1%, acknowledging a recent decline in the approval rate for consumer loans over the past few months. Despite this, stalwart pillars such as mortgages, hire purchase (HP), and credit cards are expected to support consumer loans. However, we anticipate a more subdued growth in property sales at 6%, compared to the robust 12% projected in 2023. Additionally, there are indications of a relaxation in forward sales orders, which may translate to a lower TIV in 2024, which we have projected at 650k units, reflecting a 7.1% YoY decrease.

Taken together, we raise the 2024 loan growth forecast to 5.8% from 5.1% previously. Nevertheless, we reiterate our NEUTRAL call on the sector due to several potential downside risks to the sector’s earnings, such as 1) underlying fears of a deterioration in asset quality due to significant external shocks, such as a broader regional conflict in the Middle East that could result in a substantial increase in inflationary pressures, 2) potential softer contributions from overseas operations, and 3) sustained elevation in overhead expenses. We also note that many banking stocks under our coverage are trading at or above 1-SD of their 5-year PBV cycle, indicating stretched valuations.

We maintain a BUY recommendation on CIMB, Hong Leong Bank and Alliance Bank. HOLD RHB Bank and Maybank. SELL reiterated for Public Bank and Affin Bank. Meanwhile, we also downgrade AMMB SELL from hold as the risk-reward potential has narrowed, given the recent rise in the share price.

Source: TA Research - 5 Feb 2024

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