Dec 2024 system loans grew by 5.5% which is within our CY24 expectation of 5.5%-6.0%, spurred by strong mortgage, hire purchase and working capital loans ahead of a seasonally lumpy 1QCY25. On the flipside, deposits growth fell short at 3.0% against our targeted 3.5%-4.0% with funding cost optimisation by banks reflecting less attractive returns to customers.

For CY25, we anticipate industry loans growth to come in at 6.0% supported by Johor-based projects but with deposits growth to be muted at 3.0% as banks are less likely to pursue more aggressive competition for liquidity in the near-term. Immediate headwinds consist of uncertainties in foreign trade policies and RON95 subsidy rationalisation possibly hampering consumer appetite for loans. Amidst this, we anticipate OPR to remain stable at 3%.

Our 1QCY25 top picks are: (i) AMBANK (OP; TP: RM6.40) for efforts in optimising its ROE and higher trajected payouts to drive dividend yields (c.6%), and (ii) MAYBANK (OP; TP: RM11.95) for remaining the market share leader whilst still expanding at the expense of larger peers. Its dividend yields (c.6%) continue to lead and are expected to be entirely in cash.

Year-end boosted by businesses. In Dec 2024, system loans grew by 5.5% which is at the lower range of our CY24 target of 5.5%-6.0%. On a YoY basis, the higher reporting was mostly driven by household loans (+6.0%), thanks to residential mortgages and hire purchases being persistently supported. Business loans (+4.8%) were led by financial service sectors (+21.0%) and working capital needs (+4.7%), which was more prominently felt on a MoM basis, growing by 1.1% as opposed to household's 0.5%. This is likely spurred by more intensive cash flow requirements as businesses operate towards a seasonally dense 1QCY25 period (refer to Tables 1−3 for breakdown of system loans).

Applications backlog clearing up. Total system applications declined by 9% YoY and 14% MoM following the heavier disbursements seen during the period. We anticipate new applications to remain more modest until the Hari Raya season closes in due to abovementioned higher cash flow needs by businesses. We note that loan applications for transport vehicles (+12% YoY, +9% MoM) appear to remain resilient, spurred by year-end promotions with new launches looking to keep demand intact throughout CY25. The comparatively lower base for applications resulted in loan approval rates to also spike up in Dec 2024 to 61.8% (Nov 2024: 53.4%), albeit still lower than Dec 2023's 63.2% (refer to Tables 4−5 for breakdown of system loan applications and approvals).

In the pink of health. Industry GIL came in at 1.44% (Nov 2024: 1.51%, Dec 2023: 1.65%) which is the lowest reported pre-pandemic GIL so far, previously being 1.48% in Dec 2019. We opine current levels could be sustained as loan repayments remain consistent. This is solidified by industry LLC appearing stable at 91.4% (Nov 2024: 91.2%, Dec 2023: 91.9%) with banks seeming to ease topping up provisions further. That said, we remain watchful on potential turnarounds to asset quality which could arise from: (i) unfavourable trade policies introduced in the Trump administration, (ii) tighter-than-expected RON95 subsidy rationalisation, and (iii) setbacks in data centre development (refer to Tables 6−7 for breakdown of system impaired loans).

Deposits growth disappointed. Dec 2024 deposits closed with a mere 3.0% growth (+0.8% MoM) which was below our 3.5%-4.0% target for CY24. With CASA ratio being relatively stable at 28.8% (Nov 2024: 28.7%, Dec 2023: 28.5%), customers likely see less incentive to deposit given the lower interest returns relative to the prior year as banks also work towards reducing their funding costs. For now, industry loans-to-deposit ratio is not overly stretched at 87.8% (Nov 2024: 87.8%, Dec 2023: 85.8%) which may not pose liquidity pressure for banks which deploy more targeted loan acquisition strategies with other funding sources more likely to be utilised (i.e. sukuk).

Maintain OVERWEIGHT on the banking sector. Despite less favourable news flows from the technology sector, we opine that the sector's fundamentals are intact, mainly absent previously distortive provisions and writebacks from pandemic overlays out of the picture. Going into CY25, we project for industry loan growth to come in at 6% on the back of ongoing developments in Johor's Special Economic Zone and ongoing data centre projects, supported by a stable OPR of 3% anticipated throughout CY25. We hold a deposits growth target of 3% as we reckon banks are not likely to grow more aggressive with their offered rates in the near-term. A cheaper funding cost structure benefits retail-centric banks (i.e. PBBANK, HLBANK) as corporate wholesale deposits typically demand more attractive rates, which we see the likes of AMBANK pivoting away from.

Within our coverage, we like AMBANK on the back of a more solid ROE backbone as the group focuses on stronger earnings drivers as opposed to gaining market share in less profitable segments. Following its recent transition into FIRB, the group's newly acquired CET-1 levels of 15% could lead to more generous dividend payouts and make AMBANK one of the leaders in yield prospects (c.6%). This is premised on our anticipated dividend payout of 50% against the group's more gradual step-up of 45% (from 40%). Among the large cap banks, we favour MAYBANK as despite its leading market share, it still holds better-than-industry asset quality with earnings growth expected to outpace its counterparts.

Source: Kenanga Research - 3 Feb 2025