July 2024 system loans grew by 6.4% which is within our expectations of 5.5%-6.0% for CY24 on lower sequential growth to come. Household loans continued to demonstrate unyielding demand whereas business loans may only react positively from the development of nationwide themes and projects. Meanwhile, deposits are growing (+4.8%) albeit at a slower-than-expected pace, prompting us to rationalise our CY24 target to 5.0%-6.0% (from 5.5%-6.0%).

We keep our OPR stance of 3% throughout CY24 which will carry on into CY25. With regards to our stock calls, the recent buying rally for domestic banks reflected a decent appreciation for CIMB (TP: RM7.60) and ABMB (TP: 4.60) of 10% and 5% in Aug 2024, respectively, which led to a downgrade to MP in both (from OP). Among our sector picks earlier, we still like RHBBANK (OP; TP: RM7.25) as it continues to generate the industry leading yield at c.7%. For the moment, we add PBBANK (OP; TP: RM5.10) and HLBANK (OP; TP: RM26.20) to our Top Picks amid higher economic growth expectations, backloaded loan guidance by banks for 2HCY24 despite deposits trailing loans growth. We think investors will resonate with banks that take a more disciplined approach to underwriting. We maintain our OVERWEIGHT call for the sector.

Business loans taking a back seat. In July 2024, system loans grew by 6.4% YoY which we deem to be still within our projected 5.5%-6.0% target for CY24. Sequential growth may ease relative to higher year-end bases. Household (+6.5%) and business loans (+6.4%) held up from overall greater demand for mortgages and working capital respectively. On a MoM basis, households retained their growth (+0.6%) supported by the same pillars but we saw business loans easing (-0.4%) likely due to the fewer working capital credit lines loaded up for 1H seasonality. We also note that construction-related financing declined by 2.2% but this may just a lull pending larger projects to kick off in 2HCY24 (refer to Tables 1−3 for breakdown of system loans).

Loan applications surged. Nearly all sectors saw a double-digit spike in applications with a total MoM reading of 24% (YoY +18%). Across households, residential properties regain (+18%) likely spurred by new launches entering the second half of the year with construction purposed applications seeing the strongest gain of 31%, supporting our abovementioned hypothesis. On the other hand, general approval ratings seem to be normalising at 52.4% (Jun 2024: 54.6%, July 2023: 52.6%) and is similarly reflected in residential mortgage approvals of 44.1% (Jun 2024: 44.9%, July 2023: 43.8%) (refer to Tables 4−5 for breakdown of system loan applications and approvals).

GILs staying low. Industry GIL continued to improve at 1.58% (Jun 2024: 1.58%, July 2023: 1.78%) from more fruitful loan recoveries seen post-festivities in 1HCY24. Loan loss coverage for the industry lingers below 100% at 91.8% (Jun 2024: 91.5%, July 2023: 91.5%) which suggests most banks have seen subdued credit risks, possibly backed by better income and economic prospects. For the moment, there does not appear to be any noticeable shift in GIL following the removal of diesel subsidies for businesses since 10 June 2024 (refer to Tables 6−7 for breakdown of system impaired loans).

Cash liquidity mostly still. Industry loan-to-deposit ratio came in at 87.5% (Jun 2024: 86.8%, July 2023: 86.1%) as July 2024 system deposits only grew by 4.8% which is below our target of 5.5%-6.0% for CY24. With the view that deposit rates will continue to dilute as banks focus on margin stabilisation, we update our deposits growth target to 5.0%-6.0% with hopes of a pick-up during the year-end. There was a MoM decline of 0.6% in deposit balances mainly attributed by withdrawals from demand deposits which led CASA readings to register at 28.4% (Jun 2024: 28.6%, July 2023: 28.0).

Maintain OVERWEIGHT on the banking sector. The recent reporting season has solidified the banks’ position as a resilient beneficiary of the returning economic prosperity, fuelled by strategic investments and long-awaited infrastructure developments in the country. A firm stance on monetary policy has also gained better favour among foreign investors together with hopes for a strengthening domestic currency. We maintain our view that OPR will remain at 3% throughout CY24, with CY25 still hinging on further economic track records to show.

Our previous top picks of CIMB and ABMB have done well and have reached their respective fair values. We still see opportunities in RHBBANK as it continues to clean up its books towards better asset quality standing. Meanwhile, its leading dividend prospects (c.7%) still stands firm amid sector yields diluting to c.5% from c.6%.

Quality picks may come next. Most stock gainers are tied to higher earnings growth. Amid a strong 2QCY24 GDP print, and exuberant loan applications against approvals, we think banks that take a more disciplined approach to balance loan growth while preserving asset quality will start to resonate better with investors. Hence, we recommend PBBANK and HLBANK to be the next picks for investors.

Source: Kenanga Research - 2 Sept 2024