• Stay OVERWEIGHT with CIMB, AMMB, and Alliance Bank Malaysia as Top Picks. System loans growth continued its strong momentum in Oct 2022, gaining 6.5% YoY. Deposits lagged behind slightly, as CASA and fixed deposits stayed flat MoM. Asset quality remained robust, with banks maintaining healthy levels of provisions for buffer. Loans growth at 10M22 outperformed our expectations therefore we raise our FY22F to 5.8%.

• System loans increased 6.5% YoY (MoM: +0.6%), driven by households (+6% YoY, +0.5% MoM), and wholesale & retail trade (+12% YoY, flat MoM). MoM strength was also evident in the utilities sector (+12% MoM, +44% YoY). Business loans growth of 6.9% YoY outpaced growth among households of 6.3%. Elsewhere, residential mortgages (+7% YoY) and working capital loans (+9% YoY) were also on the rise. We revise our 2022 system loans growth rate to 5.8% (from 5.7%) on the back of the stronger- than-expected 10M22 performance.

• Higher lending rates fuel NIM expansion. The average lending rate (ALR) added a further 25bps MoM to land at 4.68% at the end of October. On the other hand, the 12-month fixed deposit rate stayed flat MoM as banks looked to capitalise on the repricing lag, to attain higher NIMs before the tentative repricing of FDs at the year end. In the recent reporting season, all banks under our coverage reported higher NIMs YoY, mostly fuelled by the several Overnight Policy Rate (OPR) hikes YTD.

• Soft brakes on lending indicators. Appetite for financing appears to have softened, with system loan applications declining 7% MoM in October. Loan approvals and disbursements were also down 12% and 2% MoM respectively. Regardless, all three lending indicators are elevated compared to pre-pandemic levels, and should sustain loan growth at mid- single digit at least until the year-end. For 2023, we expect some moderation in loans growth, but the extent remains to be seen.

• Asset quality holding up well. GILs were up a slight 1% MoM, with upticks in mining & quarrying GILs (+4%) and household GILs (+1%) offsetting decreases in the transport sector (-2%). Business GILs eased 2bps MoM to 2.66%, while household GILs were up marginally to 1.23%. Despite this, we believe a healthy LLC of 96.7% – while down 1ppt MoM – still provides ample buffer for the banks. During the recent reporting season, most banks stressed the need to stay cautious in view of the challenging macroeconomic headwinds ahead and would prefer not to write back overlays at least until 2023.

• Flat deposits as competition heats up. Deposits growth was flattish MoM (YoY: +10%) as banks continued to compete for deposits before further rate hikes. For 10M22, deposit growth of 1.9% has lagged behind loans growth of 5.1%, but an LDR of 85.9% (Dec 2021: 86.2%) implies the banks still have ample liquidity in store. CASA ratio stayed flat MoM at 41.3%, having come down from a year-high of 43.1% in April.

Source: RHB Research - 6 Dec 2022