Banks to ride on sustained loan demand

Kenanga upgrades industry loan growth expectations

“Banking corporates also share similar sentiment with key loans growth strategies aimed at enabling SMES to expand.” Kenanga Research

PETALING JAYA: As global recessionary concerns continue to impact market sentiment, it could open up opportunities for investors to pick up banking stocks, whose valuations are still relatively inexpensive, says Kenanga Research.

The research firm, which has an overweight call on the sector, believes local banks will continue to ride on sustained demand for loans.

“Recent performance of the second quarter (2Q) gross domestic product (GDP) and August exports are highly supportive of growth prospects and demand for business loans,” it said in report.

“While this may taper down in 2023, we anticipate a continuing overnight policy rate (OPR) up-cycle (two additional 25 basis point or bps hikes to 3% by the first quarter of 2023 (1Q23) to cushion banking net interest margins (NIMS).”

Approaching 4Q22, Kenanga anticipates one last 25 bps OPR hike in November.

However it does not anticipate Bank Negara to be as aggressive as the US Federal Reserve following another 75 bps increase to the Fed Funds Rate (3.00% to 3.25%) in its September meeting as local inflation concerns are not as severe as abroad.

“While we do see gradual recovery in the supply chain and boosts to our overall economic output, developments in the Russiaukraine war could further press macro conditions, but we do not believe it would have as strong an impact as it did during the early days in February 2022,” said Kenanga Research.

It now expects 2022 industry loans growth to be between 5.5% and 6%, higher from its initial projections of 5% to 5.5% growth.

“July 2022 reported a 5.9% year-on-year system loans growth, which warranted us to upgrade our initial 2022 expectations.

“The recently reported 2Q GDP growth of 8.9% further cements our view that our local economy is regaining its health and should translate to a higher demand for loans going forward.

“Albeit, there should be some easing in 4Q22 as production bottlenecks ease but all this would justify our in-house 2022 GDP forecast of 5.7%,” added Kenanga Research.

It anticipates its newly revised GDP growth expectation of 6.7% to be met by a significant return in the small and medium enterprise (SME) sector which was the most affected during the movement control orders.

“Banking corporates also share similar sentiment with key loans growth strategies aimed at enabling SMES to expand. Service sectors such as hospitality, retail and tourism are likely to be at the forefront,” it said.

While industry gross impaired loan (GIL) ratios did see an uptick during the recent 2Q reporting season, Kenanga Research does not believe this would transpire to higher levels as this was a normalisation of rates post-repayment assistance.

“Certain banks have notably been able to bring their GIL to more respectable levels and are expected to maintain similar asset quality as we do not anticipate further on-boarding of higher-risked assets,” it added.