Investment Highlights

• Industry loan growth remained stable at 6.4% YoY in July 2024. YTD loans grew by 4.6% annualised, slightly below our loan growth expectation for the sector in 2024 of 5%-6%. Household loan growth rose marginally to 6.5% YoY, supported by faster pace of loan expansion for purchase of passenger vehicles and stable mortgage loans. Meanwhile, growth in non-household loans in July 2024 was sustained at 6.4% YoY.

• Better traction of loan applications and approvals in July 2024. Higher loan demand from household and non-household sectors.

• Deposit growth moderated while CASA ratio slipped. Deposit growth fell to 4.7% YoY in July 2024 (June 2024: 4.9% YoY). LD ratio for the sector inched higher to 87.5% in July 2024 from 86.8% in June 2024. The sector's loan-to-fund ratio/loan-to-fund and equity ratio increased marginally to 83%/72.2% in July 2024. Sector LCR decreased to 151% in July 2024 mainly due to commercial banks. Growth in CASA moderated to 6.4% YoY, leading to a slightly lower CASA ratio of 29.5%.

• Lower impaired loans and provisions for the sector. Asset quality holding up with industry GIL/NIL ratio stable at 1.6%/1%. The industry's outstanding impaired loans declined by 0.9% MoM or RM316mil while total provisions fell 0.5% MoM or RM167mil in July 2024. The sector's loan loss cover (LLC) increased marginally to 91.8% in July 2024 (June 2024: 91.5%).

• Maintain NEUTRAL on banking sector as the recent surge in share prices has rerated the sector valuation upwards to FY25F P/BV of 1.1x from 0.9x in early Aug 2024 while potential US Federal fund rate cuts will impact NIMs of banks with operations in Singapore and Indonesia. We have seen a strong rerating of larger cap systematically important banks, Maybank/CIMB leading to higher FY25F P/BVs of 1.3x/1.2x, above their 5-year historical average P/BVs of 1.1x/0.9x. Meanwhile, valuation of Public Bank has recovered from a low 1.3x FY25F P/BV to 1.5x presently. Tracking regional valuations, the average 1.1x FY25F P/BV of the domestic banking sector is seen to have edged closer to valuations of Singapore banks (average P/BV: 1.2x) which generate higher ROEs. With the recent valuation reratings, our BUY recommendations are now leaned towards Hong Leong Bank (FV: RM24.90/share) and Alliance Bank (FV: RM4.80/share), which still have appealing valuations, and legs for further run up in share prices. Hong Leong Bank is still trading at an attractive FY25F P/BV of 1x below its 5-year historical P/BV of 1.4x. Besides, this bank has a stable asset quality with higher LLC, improving NIMs from better funding cost, potential uplift in fee income from a regional expansion of wealth management business and still-decent profit contribution from its associate, Bank of Chengdu in China. We continue to like Alliance Bank, which trades at 0.9x FY25F P/BV, offering an attractive dividend yield of 5.8%, strong topline trajectory with newly acquired consumer and SME customers, improving CI ratio and asset quality metrics. In view of the market volatility towards the end of 2024 (US monetary policy path and election uncertainties), we are keeping our BUY calls on CIMB (FV: RM8.70/share) and Public Bank (FV: RM5.10/share).

Source: AmInvest Research - 5 Sep 2024