Oct 2023 system loans increased by 4.0%, within our 4.0%-4.5% target with expectations on some pick-up during the year-end. A continued inflow of housing loans could be attributed to greater demand for affordable homes while businesses may front load on working capital to meet yearend seasonal activities. Meanwhile, industry gross impaired loans (GIL) appear stable at 1.70%.

Deposits still grew with a slight nudge to CASA levels, likely due to the expiry of long-dated fixed deposits from CY22. However, this may shrink further during the banks’ year-end bid to capture more liquidity and offer attractive product rates amidst muted interest rate prospects. We anticipate OPR to maintain at 3.00% till end-CY24, which could allow the banks plenty of room to re-optimize their product margins.

We maintain our OVERWEIGHT call on the sector, with a continued emphasis on tactical picks as investors may be selective with regards to balancing long-term fundamental strength and nearterm sentiment upliftment. We feature names such as: (i) CIMB (OP; TP: RM6.30) for its earnings trajectory which may outpace its peers in addition to better dividend prospects, (ii) AMBANK (OP; TP: RM4.80) for rising consolidation prospects fuelled by its more palatable book performance, and (iii) ABMB (OP; TP: RM4.30) as a small cap favourite given its largely comparable fundamentals which beats certain large caps. Its high exposure to SMEs could also translate to better-than-expected growth during an economic upturn.

Steady expansion. In Oct 2023, system loans grew by 4.0% YoY, in line with our CY23 expectation of 4.0%-4.5%. Household loans made most of the increase (+5.8%) fuelled by more residential properties. Meanwhile, business loans (+1.5%) were supported by more demand for borrowings by the retail and services sectors. On a MoM basis, household loans continued to expand (+0.7%) as mortgage momentum stayed but business loans saw a minor contraction (-0.2%) from the logistics and communications segment (refer to Tables 1−3 for breakdown of system loans).

Applications still flowing in (+26% YoY, +5% MoM). Household loan applications remained healthy (+21% YoY) on sustained demand for residential properties. We reckon this comes from demand migrating towards affordable homes. It also registered an 11% MoM increase. On the flipside, while business loans applications surged on a YoY basis (+31%), it had likely peaked following some minor easing (-1% MoM) as they waited for their approvals and disbursements (refer to Tables 4−5 for breakdown of system loan applications).

Asset quality continues to improve. Oct 2023 GIL came in at 1.70% (Sep 2023: 1.72%, Oct 2022: 1.82%). Although there was an increase in absolute delinquencies on household loans, it was outpaced by system loans growth. Industry loan loss coverage was flattish at 91.3% (Sep 2023: 91.2%, Oct 2022: 96.7%) as banks could be more modest on write-backs, preferring to exercise precaution on concerns of extended cost pressures to consumers (refer to Tables 6−7 for breakdown of system impaired loans).

CASA returns. System deposits grew by 4.3% YoY, which we deem to be within our CY23 deposits growth target of 5.0%- 5.5% driven by year-end seasonal spike as banks offer attractive closing rates. That said, CASA did see some slight increase to 28.3% (Sep 2023: 28.1%, Oct 2022: 29.5%) possibly from the expiry of long-term fixed deposits which were booked in CY22. While banks may prefer to hold a higher CASA proportion, we opine this level may reduce in the coming months owing to the above mentioned year-end seasonality.

Maintain OVERWEIGHT on the banking sector. We remain confident in the resilience of the banking sector amidst other industries likely to be adversely affected by volatility in commodity prices and exchange rates. With a stable rate environment likely to be sustained in the coming months, it poses an opportunity for banks to recalibrate their profit rates and regain lost margins from past deposits competition. We also opine asset quality to be mostly unconcerning as most banks remain highly capitalised, albeit prepared to further load up on provisions if necessary.

For Top Picks, we continue to feature CIMB as they remain to be one of the best-poised players to demonstrate above-industry growth thanks to their enlarging regional footprint. On the other hand, CIMB’s sizeable overlay relative to earnings present some handsome translation to earnings and special dividends. We also highlight AMBANK as we believe its current fundamentals are highly supportive of healthier discussions for M&As, which have in the past been frequently considered. The group is also one of the leaders in terms of SME profile, which is touted as a high-growth segment that could accelerate market share growth for the group should we anticipate better economic prospects in the medium-term. For smaller cap banks, we see potential in ABMB to be a favourite as it is fundamentally comparable to larger cap peers in both dividend and ROE. The group’s strength lies in its high proportion of quality SME accounts which also led the group to maintain one of the highest NIMs amongst its peers.

Source: Kenanga Research - 1 Dec 2023