• Maintain OVERWEIGHT, Top Picks in order of preference: AMMB, Public Bank, Hong Leong Bank, and Alliance Bank Malaysia. Bank Negara Malaysia’s (BNM) banking system statistics for Aug 2024 showed continued strength in system loans growth, while asset quality remains sound across the board. We think this should translate well for the operations – and eventually, earnings – of the banks under our coverage (MY Banks). As such, the sector could provide investors with some shelter in periods of volatility.

• System loans grew 6.0% YoY (MoM: +0.3%), driven by household loans (+6% YoY, +1% MoM), as well as the finance (+16% YoY, -2% MoM) and wholesale & retail trade (+10% YoY, +1% MoM) sectors. On the other hand, we saw a slight decline in loans to the utilities sector (-11% YoY, flat MoM). Residential mortgages (+8% YoY, +1% MoM) and hire purchase loans (+10% YoY, +1% MoM) continued to be the main drivers of household loans. YTD, system loans have grown at an annualised 4.4%, which trails our 5-5.5% forecast for 2024 for now.

• Could loans growth pick up towards the year-end? 8M24 lending indicators show that system loan applications and approvals were up 5% and 4% YoY. Of this, business loan approvals were up by a healthy 4%, which indicate that there could be chunky loan disbursements in the remaining four months of the year. We also note that most of the banks under our coverage are aiming for loans growth north of 6% in their respective financial years, implying some optimism from the lenders in the domestic economy.

• System deposits increased 4% YoY (flat MoM), ie at a slower pace compared to loans growth – this led to a tightening of the system LDR to 88.0%, close to the all-time high levels of c.89%. We believe the tighter liquidity forms part of the banks’ strategy to support NIM, as on-the-ground feedback suggests that asset yields are very competitive at present. Encouragingly, however, CASA deposits (+5% YoY, flat MoM) are growing at a slightly faster pace than fixed deposits (FD) (+3% YoY, flat MoM), which could help to alleviate pressure on NIMs.

• Asset quality remains resilient. Absolute system GIL was down 6% YoY (flat MoM), thanks to decreases in household (-9% YoY, -1% MoM) and manufacturing (-17% YoY, -2% MoM) GILs. As a result, the system GIL ratio declined to 1.58% in Aug 2024 from 1.78% in the previous year (Jul 2024: 1.58%). System LLC remains ample at 90.5% (Aug 2023: 90.6%, Jul 2024: 91.8%), and MY Banks have expressed some openness towards potentially reversing pandemic-related overlays should asset quality continue to hold up.

• Other highlights. Capital ratios appear adequate – the CET-1 and total capital ratios have been largely stable since Jan 2023 at 14-15% and 18-19%. Elsewhere, SME loans continued on its strong growth trajectory, adding a further 9% YoY (flat MoM) in July 2024 – these were driven mostly by the wholesale & retail trade, finance, and manufacturing sectors.

Source: RHB Securities Research - 1 Oct 2024