• Maintain OVERWEIGHT, Top Picks: CIMB, AMMB and Alliance Bank Malaysia. System loan growth rebounded in Dec 2022 after a sequential blip the month before – loans increased by 5.7% YoY for the full year, in line with our estimate. For 2023, we are expecting a slight moderation in loan growth to +5.4% YoY. All in, tailwinds from further rate hikes and a normalisation in credit cost justifies our unchanged OVERWEIGHT rating on the sector.

• System loans rose by 5.7% YoY (MoM: +0.7%) in Dec 2022, which broadly met our forecast. YoY growth was mostly driven by households (+6% YoY, +1% MoM) and wholesale & retail trade (+9% YoY, +1% MoM), while there was a softening in loans to the mining & quarrying sector (-23% YoY, -7% MoM). By purpose, loans for residential mortgages (+7% YoY, +1% MoM) and working capital (+6% YoY, +1% MoM) were the biggest gainers. We reiterate our 5.4% YoY loans growth forecast for 2023 – indicating a slight moderation, albeit in line with guidance from the banks.

• Softer lending indicators are within expectations. System loan applications declined by a further 8% MoM (YoY: -5%) on a 3-month moving average (3MA) basis. This is unsurprising, given that the average lending rate increased by 21bps MoM last December (YoY: +156bps) to 5.01%. As the pace of monetary policy tightening is expected to slow down, we believe a mid-single-digit loan growth rate in 2023 can still be supported. Elsewhere, system loan approvals fell 10% MoM (YoY: +8%), while system loan disbursements were up 3% MoM (YoY: +12%).

• Deposit growth on par with loan growth. System deposits grew 5.9% YoY (MoM: +1.0%) in December, tracking the loan growth for the year. Fixed deposits (FDs) (+6% YoY, +2% MoM) outpaced CASA deposits (+1% YoY, -1% MoM) – although this was expected, given the faster rise in FD rates vs CASA rates. On a MoM basis, we continued to see depositors shift their funds from CASA to FDs, presumably to take advantage of year-end FD promotions by the banks (FDs up to nine months recorded MoM increases in rates). The CASA ratio in December stood at 40.5%, having retreated from an all-time high of 43.1% in Apr 2022. System liquidity remains ample, with an LDR of 86.0% (Dec 2021: 86.2%).

• Improvement in asset quality. System GILs shrank 5% MoM (YoY: +9%), with reprieve in the transport (-68% MoM, -72% YoY) and utilities (-2% MoM, -2% YoY) sectors. Household GILs recorded a 1% MoM uptick (YoY: +15%), while business GILs declined 9% MoM (YoY: +4%). Overall, the system GIL ratio eased to 1.72% (Nov 2022: 1.83%, Dec 2021: 1.68%). Provisions were reduced by 5% MoM (YoY: +9%) in tandem with the drop in GILs, but LLC remained solid at 98.2% (Nov 2022: 98.1%, Dec 2021: 109.3%).

• Other highlights. The banking system remained well-capitalised in Dec 2022, with the system CET-1 ratio at 14.5%. SME loans charted a 6.2% growth YoY last November (MoM: +0.3%), largely driven by the wholesale & retail trade, hotels and restaurant segments (+11% YoY, +1% MoM).

Source: RHB Research - 2 Feb 2023