Positive loan growth a good sign for banks

Gross impaired loans also on the decline

“Credit card loans make up 2% of system loans, up by a strong 3.6% m-o-m, likely bolstered by heightened spending during the festive period.” Midf research

PETALING JAYA: Analysts are upbeat about the banking sector’s outlook this year, underpinned by positive loan growth numbers and decline in gross impaired loans (GIL) last December.

Several research houses have affirmed their support for the sector as loans saw a year-on-year (y-o-y) growth of 5.7% in December, which was also the rate at which lending increased for the whole of last year.

CGS-CIMB Research is positive on the 5.2% month-on-month decline in GILS, or Rm1.9bil for the industry to Rm34.9bil at the end of December, despite the economic slowdown and heightened inflation.

“Although the lower GIL could be due to the write-offs by certain banks, it could reflect the absence of significant new GIL formation.

“With this, the industry GIL ratio fell from 1.83% at the end of November 2022 to 1.72% in December.”

Meanwhile, MIDF Research noted that the write-offs came primarily from the construction sector, with its ratio declining by 327 basis points, or 3.27%, to 4.39%.

While projecting a higher GIL ratio of 2% at the end of this year, given the potential credit risks from the forecasted economic slowdown in 2023, CGS-CIMB Research maintained an “overweight” call on the banking industry.

The call is on the back of the potential re-rating catalyst of continuous expansion in net interest margins, amid an overnight policy rate (OPR) upcycle and stronger growth in non-interest income.

Among lenders, its top picks are RHB Bank Bhd, Hong Leong Bank Bhd and Public Bank Bhd.

MIDF Research, meanwhile, reported that retail loans saw stable growth of 6.8% y-o-y and 0.7% month-on-month (m-o-m), led by residential mortgages, hire purchases and unsecured loans which saw steady growth on a sequential month basis.

“Credit card loans make up 2% of system loans, up by a strong 3.6% m-o-m, likely bolstered by heightened spending during the festive period. Concurrently, business loans grew by a steady 0.7% m-o-m, following November’s contraction of 0.9% m-o-m,” noted the research unit.

It forecast system loans growth to hover between 4.5% and 5% this year, with the normalisation of lending rates making liquidity less accessible.

There is a likelihood that Bank Negara will add another 25 basis points to its OPR of 2.75% during the first half of 2023, according to MIDF Research, adding that this as an opportunity for investors to buy on weakness.

“While the sector no longer remains as attractive, we look to possible further Oprhike uplifts to net interest income, improved non-interest income outlook and attractive dividend yields. Several banking counters have also repriced lower, following Bank Negara’s decision to keep the OPR at 2.75%.”

As banks hope for better credit standings from its borrowers moving ahead, TA Research revealed that total approved loans fell in December by 16% y-o-y and 18.3% m-o-m, with business loans decreasing by 15.3% y-o-y and consumer loans receding y-o-y by 16.7%.

This is in tandem with the 16.1% y-o-y slowdown in total loan applications, underpinned by an 18.3% contraction on consumer loan applications, said the research unit.

However, it said business loan applications rose by 13.7% y-o-y in December.

Concurring with the consensus view, TA Research said loans would likely grow by 6.5% in 2023, while maintaining its “overweight” outlook on the banking sector.

It said the momentum in domestic economic activities is still intact, spurring demand for financing activities.

“We continue to foresee earnings in 2023 to be supported by more robust y-o-y loan growth, a rising interest rate environment, healthier asset quality outlook, resumption of dividend payouts and ample capital as well as liquidity reserves in the banking system.”