Highlighted Companies
Hong Leong Bank ADD, TP RM23.30, RM20.98 close
Hong Leong Bank’s (HLB) asset quality is one of the best in the sector, ranking it among the most defensive banks against credit risks from the Covid-19 pandemic. Earnings catalysts include a swift increase in associate contribution from Bank of Chengdu and above-industry loan growth.
Public Bank Bhd ADD, TP RM5.07, RM4.64 close
We rate Public Bank as an Add because we believe it is the most defensive against credit risks from the Covid-19 pandemic. Its gross impaired loan ratio is consistently the lowest in the sector.
RHB Bank Bhd ADD, TP RM7.70, RM5.88 close
RHB Bank is our top pick for banks as its CY22F dividend yield of 5.6% is among the highest in the sector. Its CY23F P/E of 6.8x is attractive (vs. sector’s 10.4x). It is also one of the biggest beneficiaries of OPR hikes among big banks.
Robust credit demand despite high inflation
- The positive surprise from Jun 22 statistics was the pick-up in loan growth from 5% yoy at end-May 22 to 5.6% yoy at end-Jun 22 despite high inflation.
- We raise our projected loan growth for 2022 from 4-5% to 5-6%, given the better-than-expected loan growth and robust loan indicators in Jun 22.
- Reiterate sector Overweight, premised on the expected expansion in net interest margin (amid the OPR upcycle) and decline in loan loss provisioning.
Diminishing downside risks for loan growth
In our report dated 30 Jun 22, we highlighted our concern over downside risks for the banking industry’s loan growth, projecting a downturn in loan momentum in 2H22 (to below the 5% yoy expansion at end-May 22). However, loan growth stayed strong and gained momentum in Jun 22; we now forecast higher loan growth in 2022 vs. our previous projection.
Positive surprises from continuous improvement in loan growth…
A positive surprise was the industry’s loan growth picking up further from 5% yoy at endMay 22 to 5.6% yoy at end-Jun 22. Momentum in the two major loan segments also improved, up from 5% yoy at end-May 22 to 5.9% yoy at end-Jun 22 for household loans and from 5.4% yoy at end-May 22 to 5.8% yoy at end-Jun 22 for business loans. We think loan growth defied inflationary pressures and the hike in overnight policy rate (OPR) thanks to Malaysia’s strong economic recovery (CGS-CIMB projects GDP growth of 6.2% in 2022) while inflation remained manageable (+3.4% yoy for CPI in Jun 22).
… and robust leading loan indicators
Another positive take from Jun 22 statistics was the robust loan applications and approvals, which surged 41.7% yoy and 53% yoy, respectively, to all-time highs in Jun 22. In view of these and the strong loan growth of 2.7% in 1H22 (from end-Dec 21 to end-Jun 22), we raise our projected loan growth for 2022 from 4-5% previously to 5-6%.
A potential qoq increase in 2Q22 loan loss provisioning
The industry’s gross impaired loan (GIL) only inched up 1bp mom to 1.65% at end-Jun 22. Meanwhile, total provision rose RM691.3m qoq in 2Q22 compared to a decline of RM595.7m qoq in 1Q22. This indicates that banks’ loan loss provisioning (LLP) likely increased qoq in 2Q22, which is in line with our view that the sector’s LLP bottomed at RM1.04bn in 1Q22. However, we think that 2Q22 LLP was lower than the total of RM2.39bn in 2Q21 (and hence a yoy decline).
Reiterate Overweight on banks
The robust loan indicators in Jun 22 should alleviate market concerns of a significant pullback in loan growth in 2H22 under the weight of high inflation and OPR hikes. As such, we reaffirm our Overweight call on banks, premised on the expected expansion in net interest margin amidst the OPR upcycle and our projected drop in loan loss provisioning in 2022F. Our picks for the sector are RHB Bank, Hong Leong Bank and Public Bank.
