Bank Negara Malaysia’s (BNM) Monthly Highlights report for June 2023 noted that credit to the private non-financial sector remained stable at 3.9% compared to 4% in May 2023.
However, business credit experienced a slight slowdown, growing at a rate of 2.6% compared to the previous rate of 2.8%.
Nevertheless, Maybank Investment Bank Bhd analyst Desmond Ch’ng has maintained a “positive” outlook on banks even though loan growth in June 2023 at 4.4% falls short of the projected full-year loan growth forecast of 5%.
“Nevertheless, we expect a pick-up in loan growth in H2 2023 amid easing inflationary pressures, stable interest rates and a stronger ringgit,” he said.
With the alleviation of margin pressure, it is anticipated that improved interest margins will be a contributing factor in H2 2023.
Meanwhile, the current account savings account (CASA) ratio has experienced a sixth consecutive month of contraction, but the decline has slowed to 4.2% year-on-year (y-o-y) compared to 4.9% in May 2023.
“The industry’s CASA ratio nevertheless improved to 29.3% end-June 2023 from 28.9% end-May 2023 and compares against a pre-Covid CASA ratio of 26.5% end-Dec 2019,” Ch’ng said.
Coupled with that, it was revealed that headline inflation fell to 2.4% in June 2023 from 2.8% in May 2023. Consequently, the return on deposits has become positive, the first occurrence since February 2021.
As a result, it has alleviated concerns over potential interest rate hikes.
Maybank Investment’s preferred bank stocks are CIMB Group Holdings, AMMB Holdings Bhd, Alliance Bank Malaysia Bhd, Hong Leong Bank Bhd, Hong Leong Financial Group Bhd, and RHB Bank Bhd.
Loan growth poses no worries
CGS-CIMB Research analyst Winson Ng maintained his “overweight” recommendation on banks, and expressed little concern about the slowdown in loan expansion.
“We are not overly concerned about the weakening of the loan growth as even if it disappoints, we do not expect loan growth in 2023 to be far below our projected 4% to 5%.
“Every 1% point cut in our loan growth projection would only lower our calendar year 2024 forecast net profit by 0.8%, based on our estimate,” he said.
Additionally, the analyst regarded the significant month-on-month (m-o-m) reduction of RM796.5 million in gross impaired loans (GIL) during June as a positive indicator, marking the largest decline in the first half of this year.
This lowered the banking industry’s GIL ratio from 1.8% at end-May 2023 to 1.76% at end-June 2023.
“Based on the latest trends, we think that the GIL ratio should peak soon. Hence, we see minimal risk of GIL ratio surpassing our end-2023 projection of 2%,” he added.
Ng remains bullish on the banking sector, citing a potential additional drop in loan loss provisioning (LLP) during the second quarter of 2023 (Q2 FY2023).
“We were positive on the 35.7% q-o-q fall in the sector’s LLP to RM937.6 million in Q1 2023.
“It is even more encouraging that the LLP would decline further in Q2 FY2023, deduced from the massive RM1 billion reduction in the banking industry’s total provision (cumulative provision by banks over time) in Q2 FY2023, compared to a decrease of RM134.1 million in Q1 2023.”
CGS-CIMB’s top pick is RHB Bank (Add, TP: RM7.62) due to its appealing valuation and dividend yield as well as a potential surge in dividend payout.
The potential downside risks for its sector rating would be a deterioration in loan growth and asset quality.