Investment Highlights

• Industry loan growth moderated to 6% YoY in Aug 2024 from 6.4% YoY in July 2024 and was within our 2024 loan projection for the sector of 5-6%. This was not surprising given the strategy of most banks to grow loans in the preferred segments with the right pricing to protect NIMs. Household loan growth eased marginally to 6.4% YoY (July 2024: 6.5% YoY), with a slower pace of loans for purchase of passenger cars and personal loans. Growth in non-household loans eased to 5.4% YoY (July 2024: 6.4% YoY) contributed by a slower pace of working capital loans to non-SMEs.
• Slowdown in pace of loan applications and approvals. Loan applications decelerated to 0.7% YoY (July 2024: 17.5% YoY). Aug 2024 saw a slower growth in both household and non-household applications. Meanwhile, approvals were slower for both household and non-household loans.
• Deposit growth fell to 3.8% YoY (July: 4.7% YoY) contributed by decline in FDs and foreign currency deposits. LD ratio for the sector inched higher to 88% (July 2024: 87.5%) due to a slower system deposit growth. Sector LCR decreased to 145% (July 2024: 151%) attributed to the lower ratios of commercial, Islamic and investment banks. Growth in CASA continued to moderate for the 3rd consecutive month to 4.8% YoY. CASA ratio stood at 29.6% as of end Aug 2024. Deposit competition has been seen as less intense with digital banks lowering their deposit rates. Nevertheless, intensity of the competition could rise again in 4Q24 with the seasonal year end FD campaigns.
• Lower interest spread by 4bps MoM. This was due to a lower average lending rate by 4bps MoM while the 3-month FD rate was unchanged.
• Mild upticks in impaired loans supported by robust macroeconomic environment while provisions for the sector trended lower in Aug 2024. Impaired loans rose by 0.3% MoM while provisions declined by 1.1% MoM due to lower stage 2 provisioning. Asset quality continued to hold up with industry GIL/NIL ratio at 1.6%/1%. The sector's loan loss cover (LLC) decreased to 90.5% (July 2024: 91.8%) attributed to the increase in impaired loans.
• Maintain NEUTRAL on banking sector. With the recent rerating of the sector valuation upwards to FY25F P/BV of 1.1x from 0.9x in early Aug 2024 while potential US Federal fund rate cuts will impact NIMs of banks with operations in Singapore and Indonesia, we advocate a value-based investing strategy for banking stocks. The recent banking share prices retreat despite the positive regional sentiment lifted by China's stimulus packages provide the opportunities to relook into the larger cap systematically important banks, CIMB (BUY/FV: RM8.70/share) which has retreated from FY25F P/BVs 1.2x to 1.1x as well as Public Bank (BUY/FV: RM5.10/share) that has pulled back from FY25F P/BV of 1.5x to 1.4x. Meanwhile, we continue to see appealing valuations for the smaller capitalised banks, Hong Leong Bank (BUY/FV: RM24.90/share) and Alliance Bank (BUY/FV: RM4.80/share). Hong Leong Bank is still trading at an attractive FY25F P/BV of 1.1x below its 5-year historical P/BV of 1.4x. Besides, this bank has a stable asset quality with higher LLC, improving NIMs from better funding cost, potential uplift in fee income from a regional expansion of wealth management business and still-decent profit contribution from its associate, Bank of Chengdu in China. Further rerating of Hong Leong Bank is likely on the back of a more positive sentiment from the potential recovery of China's economy. We continue to like Alliance Bank, which trades at 0.9x FY26F P/BV, offering a decent dividend yield of 5.7%, strong topline trajectory with newly acquired consumer and SME customers, improving CI ratio and asset quality metrics.

Source: AmInvest Research - 1 Oct 2024