• Maintain OVERWEIGHT; Top Picks: AMMB, Public Bank, Hong Leong Bank and Alliance Bank Malaysia. From Bank Negara Malaysia’s (BNM) 1H24 Financial Stability Review report, we gather that leading financial stability indicators – debt-servicing capabilities of households and non-households – remain robust. Sustained economic activity is positive for credit demand, especially from businesses, and the banking system has ample liquidity to meet said demand. We still favour the banks as a proxy to Malaysia’s strong macroeconomic story, and as a defensive play in periods of high volatility.

• Non-households – benefitting from economic spillover effects. Positive domestic demand and strong export recovery have led to an improvement in business activities. As such, businesses are able to maintain decent debt servicing capabilities. The interest coverage ratio rose to 6.2x in 1H24 (2H23: 5.8x) while the overall share of firms-at-risk also declined by 5ppts HoH to 23%. BNM also sees business loans accelerating ahead, especially with the gradual gestation of approved foreign/domestic direct investments.

• Households – still resilient. Household loans grew by a strong 6.2% YoY in 1H24, while debt service ratios remained robust. Unsecured debt (eg credit cards and personal financing) as a proportion of total household debt remained largely flat HoH at 15.2%, indicating no significant uptick in debt servicing risk. On-the-ground research also indicates that households are coping well with cost of living pressures. Hence, household asset quality – which has been stable since the turn of the year – should remain resilient.

• Financial markets remained orderly despite a spike in the financial market stress index in Aug 2024 amid fears of a hard landing from the US economy. These worries have since eased. Investor appetite, especially for emerging market assets, improved in tandem with the more dovish pivot from the US Federal Reserve (US Fed), though the pace of the US Fed’s monetary policy should continue to underpin investor sentiment. Separately, the central bank indicated that risks relating to geopolitical tensions in the Middle East are well-contained, and banks should continue to keep a watchful eye over suspicious transactions and money-laundering schemes.

• Other highlights. Despite the banking system LDR nearing all-time high levels, BNM is not overly concerned about liquidity, as the banks also have healthy levels of non-deposit funding sources. The liquidity coverage ratio (LCR), BNM’s preferred measure of system liquidity, remained healthy at 155.1% (Dec 2023: 161.0%). BNM also estimates that banks under the standardised approach could enjoy a c.25bps uplift to total capital ratio from the gradual implementation of Basel III reforms. This could allow the banks a greater degree of capital management. On ESG initiatives, BNM is actively advocating for climate finance innovation to improve the availability and scalability of transition financing solutions.

Source: RHB Securities Research - 4 Oct 2024