Apr 2024 system loans increased by 6.1%, within our 5.5%-6.0% expectation for CY24 with some slight easing expected as backloaded loans clear off. Households continue to lead the numbers but we are seeing strength in retail and service sectors, possibly driven by higher overall consumer spending and economic prospects. On the flipside, deposit growth (+5.0%) is likely held back by higher festive spending in lieu of Hari Raya festivities, which also hampered MoM loans growth and applications.

We anticipate OPR to remain at 3% throughout CY24, with any change likely to have a downside bias. We maintain our OVERWEIGHT call on the sector, with its resilience to be emboldened by better economic prospects fuelled by infrastructure projects and investments. For 2QCY24, we pick: (i) CIMB (OP; TP: RM7.60) for its newly sustained growth for greater ROE-dividend yield offering to shareholders, (ii) RHBBANK (OP; TP: RM7.25) for its leading dividend prospects, and (ii) ABMB (OP; TP: RM4.60) as a small cap favourite given its largely comparable fundamentals which beats certain large caps.

Stabilising during festivities. In Apr 2024, system loans grew by 6.1% YoY which we deem to be within our projected 5.5%- 6.0% target for CY24, with household (+6.5%) driven by higher mortgages and hire purchase accounts. Business loans also grew (+5.6%) from strength in retail and service sectors. On a MoM basis, overall system was flattish (+0.1%) but as a result of business loans tapering down slightly (-0.4%) possibly as smaller enterprises settle their repayments before festivities kick in. Meanwhile, households kept its growth (+0.4%) from more property transactions. (refer to Tables 1−3 for breakdown of system loans).

Applications appear soft. Although Apr 2024 applications increased by 14% YoY which was entirely led by stronger demand from household sectors, it was flattish MoM as we are likely in a continued state of easing in lieu of Hari Raya festivities. This was balanced by households declining by 1% while business loans (+2%) likely kept up with working capital needs. (refer to Tables 4−5 for breakdown of system loan applications).

GIL stayed stable. Industry GIL increased slightly to 1.63% (Mar 2024: 1.62%, Apr 2023: 1.78%) with a continued consumption of industry loan loss coverage to 91.8% (Mar 2024: 92.1%, Apr 2023: 94.2%). While corporates did indicate some stress in the quality of certain retail accounts, this could be due to delayed repayments over prioritising immediate festive spending. Meanwhile, banks are also easing back on frontloading provisions and utilise existing bookings to cover its impairment needs. (refer to Tables 6−7 for breakdown of system impaired loans).

Lower deposit balances. Apr 2024 system deposits were stable at 5.0% growth YoY but saw a 0.5% decline MoM, likely attributed to the abovementioned festive spending in lieu of Hari Raya celebrations. This puts current levels below our 5.5%- 6.0% growth expectations for CY24 for now, hopeful for more deposits in the second half of the year. This could have also attributed to CASA levels dropping again to 28.4% (Mar 2024: 28.6%, Apr 2023: 27.9%) and shifting up industry loans-todeposits to 86.3% (Mar 2024: 85.8%, Apr 2023: 85.4%).

Maintain OVERWEIGHT on the banking sector. Market tailwinds (i.e. persistent loans growth and GDP, better margin retention) are expected to continue outweighing industry headwinds (i.e. inflationary pressures, weaker MYR), which we believe may lead to fewer tests to the sector’s resiliency. The sector should be of interest with dividend yields still appearing attractive (6%-7%) on most names on top of lower embedded sector volatility as compared to other industries. We had seen meaningful moves in share prices with the inflow of foreign investors looking to accumulate sector heavyweights.

Our sector top picks for 2QCY24 include CIMB which has been able to reach new grounds in its ROE at c.11% which the group looks to sustain into the long-term thanks to strengthening presence in both home and regional markets. Additionally, its dividend yield is creeping well into the mid-6% levels at current price points, which is the highest amongst the top 3 banks. RHBBANK is also favoured for its dividends which we project to be the leader (7%-8%) amongst its peers. Meanwhile, its associate Boost Bank may soon enter the public domain which could garner greater interest in the near-term. As for small cap banks, ABMB remains our favourite for its solid fundamentals which are comparable to its large cap peers. Additionally, its leading CASA level may provide the group nimbleness to balance its interest margins with market share acquisition strategies.

Source: Kenanga Research - 4 Jun 2024