Hong Leong Bankn ADD, TP RM24.10, RM20.62 close
Hong Leong Bank’s (HLB) asset quality is one of the best in the sector, making it among the most defensive banks against credit risks from Covid-19 and other headwinds. Earnings catalysts include a
swift increase in associate contribution from Bank of Chengdu and aboveindustry loan growth.
Public Bank Bhd ADD, TP RM5.07, RM4.27 close
We rate Public Bank as an Add because we believe it is the most defensive against the credit risks from various headwinds as its gross impaired loan ratio is consistently the lowest in the sector.
RHB Bank Bhd ADD, TP RM7.46, RM5.66 close
RHB Bank is our top pick for banks as its CY22F dividend yield of 5.4% is among the highest in the sector. Its CY23F P/E of 6.7x is attractive (vs. sector’s 10x). It is also one of the biggest beneficiaries of OPR hikes among the big banks.
Loan growth still in the fast lane
- Industry loan growth improved from 5.9% yoy at end-Jul 22 to 6.8% yoy at end-Aug 22 (+6.5% yoy for household loans; +6.7% yoy for business loans).
- Following the uptrend in 7M22, banks’ GIL ratio likely stabilised as the ratio inched down from 1.85% at end-Jul 22 to 1.84% at end-Aug 22.
- Reaffirm Overweight on banks, premised on the expansion in net interest margin arising from OPR hike and expected decline in loan loss provisioning.
Improvement in loan growth to 6.8% yoy at end-Aug 22
The banking industry’s loan growth picked up from 5.9% yoy at end-Jul 22 to 6.8% yoy at end-Aug 22. Both major loan segments recorded improvement in momentum, up from 6.1% yoy at end-Jul 22 to 6.5% yoy at end-Aug 22 for household loans and from 5.9% yoy at end-Jul 22 to 6.7% yoy at end-Aug 22 for business loans.
We maintain our loan growth forecast of 5-6% for 2022F
Despite the strong showing of 6.8% yoy at end-Aug 22, we maintain our projected loan momentum of 5-6% for 2022F as we forecast a slowdown in loan growth in 4Q22 on the back of the fallout from hikes in overnight policy rate (OPR) and high inflation as well as weaker GDP growth in 4Q22 (+4.3% yoy in 4Q22 vs. +11.5% yoy in 3Q22 as projected by our economist). Should 2022F loan growth come in above our expectation, every 1% pt increase in loan growth (vs. our forecast) will lift our projected CY22F net profit for banks by circa 0.8%.
Potential largest beneficiaries of robust loan growth
Based on the performance in 1H22, we think the potential biggest beneficiaries of the robust loan growth in the banking industry are Affin Bank, HLB and Bank Islam. Affin Bank’s loan growth of 15% yoy at end-Jun 22 was the strongest in the sector, followed by 8% yoy each for HLB and Bank Islam.
Gross impaired loan ratio stabilising?
The industry’s gross impaired loan (GIL) ratio rose from 1.68% at end-Dec 21 to 1.85% at end-Jul 22. The uptrend in GIL ratio was in line with our expectation and due to the (1) negative impact of heightened inflation, and (2) loan default by borrowers whose financial positions had been impaired by the Covid-19 outbreak after banks unwound repayment assistance beginning in 3Q21. However, there are signs of stabilisation in the GIL ratio as it inched down from 1.85% at end-Jul 22 to 1.84% at end-Aug 22.
Reaffirm Overweight on banks
We reaffirm our Overweight rating on Malaysian banks, premised on the expected expansion in net interest margin amidst the OPR upcycle and the expected decline in loan loss provisioning in 2022. Our picks for the sector are RHB Bank, HLB and Public Bank.