• Stay OVERWEIGHT, Top Picks: Malayan Banking, Hong Leong Bank and CIMB. System loans growth remained stable, increasing 4.5% YoY, but was flattish MoM as the Aidil Fitri festivities saw a slight increase in household loans offset by a decrease in the non-household segment. Deposits rose 6.4% YoY (-0.4% MoM). Consequently, we retain our sector call. Despite topline pressure from margins and moderating loans growth, we believe banks have sufficient levers in place to support earnings and dividend growth.

• April system loans rose 4.5% YoY (flat MoM), mostly led by household (+5.2% YoY, flat MoM). Non-household (+3.5% YoY, -0.4% MoM) was driven by the transport & communications (+12.5% YoY, +0.2% MoM) and finance, insurance & biz (+12.5% YoY, +1.6% MoM) sectors, while loans for manufacturing contracted 3.8% YoY (-1.4% MoM). By purpose, the biggest drivers for system loans growth were residential property (+6.5% YoY, +0.2% MoM) and transport vehicles (+8.4% YoY, +0.8% MoM), while working capital slowed down sequentially by 0.9% (+3.2% YoY).

• Lending indicators. On a 3-month moving average (3MMA) basis, loan applications of MYR115bn improved 5% MoM, (+8% YoY) despite the average lending rate increasing 7bps to 5.26% from 5.19% in Mar 2023. Loan approvals picked up, at 5.7% MoM (+15.5% YoY), but loan disbursements saw a 2.0% decline MoM (+5.4% YoY). Overall, we believe lending indicators remain encouraging.

• System deposits. System deposits grew 6.4% YoY, outpacing loans growth, but declined marginally by 0.4% MoM. Fixed deposits continued to outpace CASA (-6% YoY, -1% MoM), with CASA ratio dipping to 30.4% (Mar 2023: 30.6%, Apr 2022: 33.8%). Feedback from some banks’ management teams suggest that the deposit competition has seen some easing post 1Q23. Assuming peak deposit campaign rates have passed, and coupled with May’s Overnight Policy Rate hike, sequential NIM pressure in the coming quarters would not be as severe as that of 1Q23.

• Asset quality. System GILs ticked up 2.2% MoM (+8.3% YoY) – mainly from the household sector (+5.2% MoM, +15,9% YoY) from a possible combination of festivities and customers exiting repayment assistance programmes, while non-household GILs remained fairly stable (flat MoM, +3.0% YoY). This led to a marginal increase in the GIL ratio by 4bps MoM to 1.78%. Provisions are still decent, with system LLC at 94% (vs pre- pandemic average of <80%) – and this should provide some buffer to address potential asset quality weakness in the near term.

• Other highlights. The banking system remains liquid and well capitalised with a LDR of 85.3% and CET-1 ratio of 14.8%. In March, SME loans increased by 2.3% YoY (+1.2% MoM) as most of the growth was driven by wholesale & retail (+10.3% YoY, +1.1% MoM) and finance (+3.2% YoY, +1.1% MoM).

Source: RHB Research - 6 Jun 2023