KUALA LUMPUR – Analysts from several research houses have remained positive about Malaysia’s banking sector after the industry’s loan growth expanded by 6.8% in August year-on-year. This was the strongest performance since pre-pandemic times and with the highest value since March 2019.
MIDF Research said although this was partly due to the lower base effects of weaker growth during the pandemic, it expects the expanding trend to continue as borrowers would lock in their loans before the full normalisation of the overnight policy rate (OPR).
The research firm revealed that August loan applications and approvals had remained well above pandemic figures, signifying a strong mid-term outlook for the industry.
“On the retail end, hire purchase and unsecured loans were the standouts, with recent months reporting year-on-year growth figures four to six times higher than that at the beginning of 2022 while residential mortgages showed relatively stable numbers in comparison.
“Business loan indicators also saw more stable figures in the month, with working capital, construction and non-residential showing more steady improvement,” it said.
MIDF said the system loan approval rate leapt to 61% in August, possibly a new high, and this could be taken as a firm indicator that banks’ risk appetite has made a good recovery.
Interestingly, it noted that several banks have deployed high loan growth strategies for the small and medium enterprises (SME) segment due to more attractive yields.
“As a result, SME loan approval rates have moderated to above 55% in recent months, well above the 35% to 40% region in pre-pandemic times.
“We see competition brewing within this space, and we are wary of the additional risk that warrants the higher yields,” it said.
Going forward, MIDF maintained a positive call on the banking sector as its core earning drivers remained strong.
“Additionally, the banking sector is often synonymous with high dividend yields, with several names offering yields above 4%.
“This should offset headwinds, namely asset quality concerns, the normalisation of operating expenses, heightened deposit competition, and still-weak non-interest income sources.
“Our top picks for the sector are Maybank with a target price (TP) RM10.41 and CIMB with a TP RM 6.16,” it added.
Kenanga Research has maintained an “overweight” call on the sector as it is encouraged by the strong loan growth performance.
“We continue to anticipate two more 25 basis points (bps) OPR hikes in the subsequent Bank Negara Malaysia meetings which could lift banking margins while allaying competitive pricing pressures, which would translate favourably on 2023 earnings.
“Our top picks are CIMB with a TP RM6.35 and Maybank (TP: RM11.05),” it said.
RHB Research is also maintaining its overweight stance on the sector with CIMB, AMMB, and Alliance Bank Malaysia as its top picks.
Maybank Investment Bank (IB) Bhd is also positive on the banking sector but highlighted that headline inflation rose further to 4.7 % in August from 4.4% in July with negative returns on deposits widening to minus 3.09% in August from minus 2.79% in July.
It also noted that impaired loans have continued to tick up with the expiry of the government’s Pemulih loan scheme in December of 2021.
It noted that gross impaired loans rose 13.9% year-to-date in absolute terms and the gross impaired loans (GIL) ratio was 1.84% at end-August 2022 versus 1.68% end-December 2021.
“Since the beginning of the year, default rates have been higher particularly in the non-residential property segment, particularly for industrial buildings and factories, commercial complexes, and shophouses.
“Default rates have also been higher for personal loans, construction, and working capital lines.
“On a month-on-month basis, however, the GIL ratio was stable at 1.84%,” said Maybank IB. – Bernama, October 3, 2022
