A rise in GIL ratio was within our expectation
? Loan growth was sustained at 5% yoy at end-Apr 22 and end-May 22. We expect loan growth to peak in Jun-Jul 22 and moderate in 2H22.
? GIL ratio rose from 1.57% at end-Apr to 1.64% at end-May, in line with our expectation of an uptrend (our projection: 1.8-2.0% at end-Dec 22F).
? Reiterate sector Overweight, premised on the expected expansion in net interest margin (amid the OPR upcycle) and decline in loan loss provisioning.
Stable loan growth in May 22
The banking industry’s loan growth was sustained at 5% yoy at end-Apr 22 and end-May 2022. This was because the pick-up in the momentum for household loans (from 4.9% yoy at end-Apr 22 to 5% yoy at end-May 22) offset the slowdown in the growth of business loans (from 5.7% yoy at end-Apr 22 to 5.4% yoy at end-May 22).
Expect loan growth to moderate in 2H22F
We continue to expect loan growth to peak at slightly above 5% yoy in the next 1-2 months and moderate in 2H22F, under the weight of higher inflation and interest rate hikes (smaller capacity to borrow and higher borrowing costs). As such, we stick to our projected loan growth of 4-5% for 2022F.
A rise in GIL ratio …
Banks’ gross impaired loan (GIL) rose by RM1.4bn mom (or +4.7% mom) in May 22, the second largest monthly increase since the outbreak of Covid-19. Consequently, banks’ GIL ratio rose from 1.57% at end-Apr 22 to 1.64% at end-May 22. This was in line with our expectation of an uptrend in banks’ GIL ratio in 2022, reflected in our projection of a higher GIL ratio of 1.8-2.0% at end-Dec 22F (vs. 1.5% at end-Dec 21).
… mainly from residential mortgages and working capital loans
Zooming in further, the mom increase of RM1.4bn in GIL in May 22 mainly came from residential mortgages and working capital loans, with shares of 32.7% and 24.9%, respectively. We think that the deterioration in asset quality was caused by banks’ unwinding of repayment assistance offered to their borrowers, which led to loan defaults by some borrowers whose financial conditions had been severely impaired by the Covid19 pandemic.
Reiterate Overweight on banks
We are not overly concerned about the uptrend in banks’ GIL ratio in May 22 as banks have built up strong provision buffers, which could be utilised to offset the provision from new impaired loans. As such, we retain our Overweight call on the sector, premised on the potential re-rating catalysts from an expected expansion in net interest margin amid the upcycle of the overnight policy rate (OPR) and a decline in loan loss provisioning. Our picks for the sector are RHB Bank, Hong Leong Bank and Public Bank.