• Maintain OVERWEIGHT, Top Picks: Hong Leong Bank (HL Bank), AMMB and Malayan Banking (Maybank). Despite the 25bps interest rate hike in May, system loans recorded the highest monthly growth rate seen YTD, +0.7% MoM in June (YoY: +5.6%). This is in line with the guidance we had received from the banks, which suggested that business momentum remains sustained despite inflationary concerns and the rising interest rate environment. YTD-June, system loans growth is tracking our full-year forecast well, which we keep at +5.1% YoY.

• System loans grew 5.6% YoY (MoM: +0.7%), bringing 2022 annualised YTD growth to 5.3% YoY, which is in line with our 5.1% growth forecast for the year. As expected, loans to the wholesale & retail trade sector continued to show strong momentum, gaining 13.5% YoY (MoM: +1.9%) on the back of sustained business momentum post-economic reopening. Elsewhere, loans for residential mortgages (+7.3% YoY, +0.6% MoM) and working capital (+7.4% YoY, 1.4% MoM) also demonstrated strong increases.

• Strong loan applications despite rate hikes. June loan applications were up 18% MoM (YoY: +42%) in spite of the 11bps MoM hike in the average lending rate to 3.79%. Auto loan applications surged 16% MoM, likely driven by the expiry of the SST exemption, and borrowers attempting to lock in a lower interest rate in anticipation of further overnight policy rate (OPR) hikes. Overall, lending indicators were healthy, with YTD-June system loan applications, approvals and disbursements up 11.2%, 24.9% and 19.4%.

• Asset quality remains robust, despite gross impaired loans (GILs) adding 7.4% YoY (MoM: +1.2%). In particular, we saw increases in GILs from households (+9.2% YoY, +1.8% MoM) and the wholesale & retail trade sector (+19.8% YoY, -0.6% MoM). However, this was expected, given the expiry of certain loan relief programmes. As a whole, system GIL ratio of 1.65% remains at a manageable level, considering LLC of 108.5% is still relatively high compared to the pre-pandemic range of 80-90%.

• Staying cautious of risky construction loans. Applications for construction-related loans almost tripled MoM in June, but approvals for such loans declined 4% MoM. Guidance from banks indicates that lenders are becoming more prudent on loans for construction purposes, as increasing building material costs and a shortage of labour are challenges confronting industry players. Construction-related GILs have increased 19% YTD-June, and had the highest GIL ratio at 6.36% (Dec 21: 5.21%), vs the overall business GIL ratio of 2.38% (Dec 21: 2.05%).

• Deposits grew 8% YoY (MoM: +0.8%), with CASA deposits adding 8.8% YoY (MoM: +0.7%). Fixed deposits grew at a slower 3% YoY (MoM: +0.7%), likely due to depositors preferring to keep liquidity in hand during inflationary periods. At end-June, system LDR stood at 86.7% (Jun 21: 88.9%, May 22: 86.8%).

Source: RHB Research - 1 Aug 2022