May 2024 system loans increased by 5.8%, within our 5.5%-6.0% expectation for CY24 as households stayed supported by inflows of new mortgage and hire purchase accounts. Meanwhile, business loans seem to be led by retail and service sectors, possibly driven by higher overall consumer spending and economic prospects. On the flipside, deposit growth (+4.9%) may likely be tied to the abovementioned prosperity.

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 3QCY24, we pick: (i) CIMB (OP; TP: RM7.60) for its newly sustained growth for greater ROE and dividend yield offerings 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.

Unwavering household portfolios. In May 2024, system loans grew by 5.8% YoY which is within our projected 5.5%-6.0% target for CY24. We saw household loans rising by 6.5%, led by residential properties and transport vehicles. Meanwhile, business loans gained 4.8% on the back of rising working capital needs with the service industries appearing to be the largest in need. On a MoM basis, business loans were flattish likely from SMEs completing their debt repayments from the earlier half’s festive needs. On the flipside, household loans continued to expand on the same mortgage and hire purchase accounts as they continued to be in demand. (refer to Tables 1−3 for breakdown of system loans).

Loan applications still modest. May 2024 applications increased slightly by 3% YoY, likely from a slight reversion from Apr 2024’s festive season. This would explain the 13% MoM increase across the sector. On both basis, mortgages showed consistent growth which may be attributed to persistent demand for affordable housing. (refer to Tables 4−5 for breakdown of system loan applications).

Steady GIL. Industry GIL remained stable at 1.63% (Apr 2024: 1.63%, May 2023: 1.80%) with industry loan loss coverage tapering off to 90.8% (Apr 2024: 91.8%, May 2023: 95.9%). We opine remaining stresses could be more SME-centric as they may be more prone to inflationary pressures, which the banks are likely keeping an eye on during 2HCY24. That said, some relief could be brought with past pandemic-related overlays that can be reallocated to other rising macro concerns. (refer to Tables 6−7 for breakdown of system impaired loans).

Stable CASA balances. May 2024 system deposits grew at 4.9% YoY and 0.45% MoM, as both households and businesses may once again be in a saving capacity post-heavy spending seen during festive periods. On that note, CASA levels remained fairly stable at 28.5% (Apr 2024: 28.4%, May 2023: 27.8%) as fixed deposits remain commonplace in both segments in spite of their slightly less attractive interest rates. With loans growth outpacing deposits, we see industry loans-to-deposits ratio coming off slightly to 86.1% (Apr 2024: 86.3%, May 2023: 85.4%).

Maintain OVERWEIGHT on the banking sector. Market tailwinds, such as ongoing loan growth and GDP improvement along with better margin retention, are anticipated to continue overshadowing industry headwinds like inflationary pressures and a weaker MYR. We believe this will likely result in fewer challenges to the sector's resilience. The sector remains appealing due to attractive dividend yields (6%-7%) on most stocks, coupled with lower inherent sector volatility compared to other industries. Significant share price movements have been observed with the influx of foreign investors aiming to acquire major sector stocks.

Our sector top picks for 3QCY24 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 three 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 - 1 Jul 2024