August 2022 system loans grew by 6.8% YoY (+0.7% MoM), beating our expectations. Hence, we raise our CY22 industry growth target to 6.0-6.5%. While better business loans were expected, the continued support from household loans was unanticipated in a rising rate environment. Applications too were lofty but could taper off after approvals and disbursements are granted. GIL trends were at stable levels (1.84%,-1 bps MoM) indicating that the industry could have normalised post-repayment assistance programs. Meanwhile, deposits growth camein as expected (+6.6% YoY, in line with 6.5-7.0% expectations) but CASA ratios are likely to dilute. We anticipate two additional 25 bps OPR hikes each in upcoming MPC meetings. We maintain our OVERWEIGHT call on the sector, with top picksfavouring optimal loans (high SME, low fixed rate financing) and deposit (high CASA) books with added merits. Our stock picks areCIMB (OP; TP: RM6.35),MAYBANK (OP; TP: RM11.05)andABMB (OP; TP: RM4.20).

Stronger economic backbone driving loans. In Aug 2022, system loans reported a 6.8% YoY growth. Although the previous Aug 2021 was possibly softer due to the implementation of the second loan moratorium, a surge in MoM performance (+0.7% MoM) was driven by more business loans (+1.0% MoM) arising from broad growth across industries. Meanwhile, a 0.5% MoM increase in household loans was surprising to us as we had anticipated slower numbers in reaction to higher interest rates. With our in-house GDP expectations also being revised to 6.7% (from 5.7%) amidst stronger-than-expected economic traction, we believe it would be fair for us to also increase our industry loans growth target to 6.0-6.5% (from 5.5-6.0%) with some easing expected in 4QCY22. (Refer to Table 1-3 for breakdown of system loans).

Applications still buoyant (+52% YoY) but stepping back (-2% MoM). August 2022 total applications were higher save for the purchase of securities as investment appetite diminished. Despite new business applications coming off meaningfully (-11% MoM), it still stands at peakish levels (all-time highest for monthly reporting behind July 2022) but could be an indication of bottlenecks being cleared. New household loan applications (+7% MoM) appeared to be driven by higher transport vehicles purchases but residential properties still appear to be in favourable despite a rising rate environment (refer to Table 4-5 for breakdown of system loan applications).

Stable GIL brings assurance. Total impaired loans increase by 8% YoY. Although this could be attributed tothe absence of active repayment assistance programs, we believe this could be rising in tandem with a higher loans base. August 2022 reported a steady GIL ratio at 1.84% (July 2022: 1.85%, August 2021: 1.82%) to also indicate as such. That said, banks are marking a slightly higher loan loss coverage at 97.3% (July 2022: 96.5%, August 2021: 103.4%) to build in more defensive bookings amidst inflationary spurred concerns on delinquencies (refer to Table 6-7 for breakdown of system impaired loans).

Non-CASA gaining prominence. Industry deposits continued to grow (+6.6% YoY, +1.4% MoM) in line with our CY22 deposits growth expectations of 6.5-7.0%. That said, the readthrough of August 2022 numbers show that CASA levels have remained flat but there is a growing proportion of higher interest yielding products. We opine that banks are becoming increasing competitive in securing lower funding costs ahead of their OPR hike projections. Meanwhile industry LDR is stable at 87%.

Maintain OVERWEIGHT on the banking sector. We are further encouraged by the strong loans growth performance, emboldening sector prospects. We continue to anticipate two more 25 bps OPR hikes in the subsequent BNM MPC meetings which could lift banking margins while allaying competitive pricing pressures. This would translate favourably on CY23 earnings, notwithstanding the lapse of CY22’s prosperity tax in addition to higher possibilities of writebacks. For the 4QCY22 season, we feature the following as our top picks :- (i) CIMB (OP; TP: RM6.35) for defensive NOII reporting as trading performances are supported by its regional entities. It also commands on of the highest CASA books amongst the large cap banks. Notably, we have awarded CIMB with a 4-star ESG rating for its sustainable financing efforts; (ii) MAYBANK (OP; TP: RM11.05) which remains our dividend favourite (7-8% yield) and provide shelter for investors preferring more secured returns. As the market share leader in loans and deposits, MAYBANK would also be widely exposed to the benefits of economic reopening; and(iii) ABMB (OP; TP: RM4.20) from amongst the small cap banks for being the leader in SMEloan proportions (30%) which is expected to be the highest growth segment as well as for its highest CASA mix (50%). The stock’s fundamentals are also comparatively better than its larger cap peers in terms of ROE (10%) and dividend yields (6%).

Source: Kenanga Research - 3 Oct 2022