Strong loan growth to buoy banking sector
Deposit and Casa segments growing healthily
“The large loan loss allowances built up over the past three years act as a robust buffer to pad any short-term spike in gross impaired loan ratio that may potentially stem from global macro headwinds and tighter monetary policy.”
UOB Kay Hian Research
PETALING JAYA: Banking statistics for March 2024 show strong loan growth, while deposit and current account and savings account (CASA) are growing healthily.
The banking system’s gross impaired loans, which indicate loans payments owed may not be fully recovered, is also well managed, said analysts.
Meanwhile, they say Islamic fixed deposit rates are showing a convincing decline but conventional rates remain flattish.
Loans growth edged upwards to 6% in March (February: 5.8%), driven by increases in both the household and business segments.
“Within the household segment, all sub-segments demonstrated resilient performance. Meanwhile, in the business segment, the expansion was primarily propelled by working capital,” said UOB Kay Hian (UOBKH) Research.
The research firm anticipates a 5.5% to 6% system loans growth for 2024, implying a 1.15 times loan to gross domestic product growth multiple which is in line with its 10-year average.
According to the research firm, the sector’s risk to reward is well balanced in the absence of strong catalysts. But the sector’s 2024 earnings growth is expected to lag the broader equity market-projected 11% rise in 2024 earnings.
It said net interest margin (NIM) is expected to remain flattish with slight downside risk. It also anticipates a slowdown in non-interest income growth. On a positive note, dividend yields for banks are attractive, surpassing 5%.
While leading loans growth indicators remain weak with loan applications declining by 12.6% year-on-year in March, UOBKH Research said the sector’s asset quality remained stable.
“Going forward, we are still not particularly worried about any asset quality weakness as banks are better equipped versus prior slumps.
“The large loan loss allowances built up over the past three years act as a robust buffer to pad any short-term spike in gross impaired loan ratio that may potentially stem from global macro headwinds and tighter monetary policy.”
Meanwhile, Kenanga Research said persistent loans growth, an improving economy and better margin retention are expected to continue outweighing industry headwinds such as inflationary pressures and the weaker ringgit.
This it believes may lead to fewer tests to the sector’s resiliency.
With dividend yields still attractive, the research firm said banks should continue to attract investor interest notwithstanding the meaningful moves in share prices with the inflow of foreign investors looking to accumulate sector heavyweights.
“Our sector top picks for 2Q24 include Public Bank Bhd, which could see better leverage on its heavy retail mortgage mix in a stable overnight policy rate environment.
“We also see its possible overlay writebacks to be a catalyst for more generous dividend payouts which may mirror more frequent payouts during the year,” it said.
Kenanga Research also favours RHB Bank Bhd for its dividends which it projects to be the leader amongst its peers.
Meanwhile, its associate Boost Bank Bhd may soon enter the public domain and this could garner greater interest in the nearterm.
“As for small cap banks, Alliance Bank (M) Bhd remains our favourite for its solid fundamentals which are comparable to its large cap peers.
“Additionally, its leading CASA level may provide the group nimbleness to balance its interest margins with market share acquisition strategies,” said Kenanga Research.