Banking sector earnings recovery underway

The financial sector is underpinned by healthier loan growth from both household and non-household segments, say analysts


MALAYSIA’S banking sector is on a sustainable recovery path underpinned by healthier loan growth from both household and non-household segments, say analysts.

Broader prospects of tightening in monetary policy is also expected to bring upside to banks’ earnings.

RHB Investment Bank Bhd’s (RHB Research) analysts Eddy Do Wey Qing and Fiona Leong maintained “Overweight” on the sector as they foresee system loan growth of 4.5%, ahead of the 3.8% forecast while asset quality remains resilient.

They have revised loan growth for 2022 to 5.2% to reflect the broad-based recovery underway in the economy.

Do and Leong said the system loans grew 0.5% month-on-month (MoM) in December, 2021 anchored on the rise in auto loans by 1.1% and mortgages by 0.8%.

“Both picking up in pace relative to November 2021, while offsetting the weakness in loans used for the purchase of securities by 1.2%,” they said.

Bank Negara Malaysia (BNM) data released on Monday showed on a year-on-year (YoY) basis, loan growth amounted to 4.5% driven by mortgages which grew by 6.8% and loans for working capital purposes which expanded by 7.1%, which together contributed about 4% of the 4.5% YoY growth enjoyed in 2021.

System loan applications on a three-month moving average basis were up 6.9% MoM.

“We are seeing stronger loan application momentum from the business segment by 7% from sectors such as transport, storage, and communication. For finance, including insurance, business activities and construction,” they noted.

Household applications grew by a slower 7% relative to the past two months.

“On a monthly basis, the growth in loan applications declined 0.6% MoM in December, dragged by weakness in loans related to securities and other purposes,” they stated.

System deposits grew 1% MoM in December while for 2021 the growth was at 8.6%.

“With MoM growth moderating from 3.6% in November, system loan-to-deposit ratio was higher at 85.7% from 83.2% the previous month,” they added.

Current account savings accounts (CASA) deposits shrank 0.3% MoM (10.9% YoY) and the system CASA ratio declined MoM to 41.8% in December from 42%.

The analysts noted that the system gross impaired loans (GILs) also declined 1.5% MoM, bringing 2021 GILs down 3.7% YoY which was broad-based and led by auto and personal loans.

SME financing was up 1% MoM in November, lifting 11M21 annualised growth to 4.2%. The MoM improvements were led by loans related to purchasing of securities, working capital loans, and the purchase of landed properties.

RHB Research’s top sector picks are CIMB Group Holdings Bhd, Malayan Banking Bhd (Maybank) and AMMB Holdings Bhd.

Hong Leong Investment Bank (HLIB Research)’s analyst Chan Jit Hoong also maintained ‘Overweight’ rating on the banking sector as its risk-reward profile is skewed to the upside and most negatives have been considered by the market.

“In our opinion, Covid-19 woes will likely fizzle out in 2022 while the state of the economy and banking sector will only get better in time.

“As such, we are bullish and employ a rather broad stock buying strategy in the first half of 2022 (1H22),” Chan said in a note.

Among the preferred banks are Maybank, Public Bank Bhd, RHB Bank Bhd, Bank Islam Malaysia Bhd and Affin Bank Bhd.

The system’s loan growth, Chan noted, was in line with HLIB Research’s full-year financial year of 2021 (FY21) estimates of 4% to 4.5%.

“We expect FY22 loans to rise at a similar pace, aided by economic recovery,” he wrote in a report yesterday.

He added that the current deposit-taking landscape continues to be competitive as deposit growth held steady at 6.3% YoY due to expansion across the board.

Asset quality showed resilience, adding credit risk has been adequately priced in by the market.

He expects BNM to support troubled borrowers, limiting a significant deterioration in the sector’s GIL ratio.

“We expect net interest margin to expand in FY22 on the back of more benign deposit rivalry, better asset security reinvestment yield, coupled with potential Overnight Policy Rate hike,” Chan wrote.