HONG Leong Investment Bank Bhd (HLIB Research) is adopting a cautious perspective when analysing the local banking sector, as no immediate catalysts are foreseen to drive significant growth.
"All in all, the risk-reward now is balanced as there are no fresh positive catalysts to spur share prices significantly higher," the research house analyst Chan Jit Hoong said in his report recently.
Hence, Chan suggests a 'Neutral' stance on the banking sector, maintaining current positions with a discerning eye on market dynamics and performance indicators.
Missing Catalysts
In his analysis, Chan observed a more balanced risk-reward scenario within the banking sector, largely due to the absence of new positive catalysts capable of significantly boosting share prices of banking stocks.
Additionally, his projections indicate a slower growth trajectory for sector profits in fiscal years 2024 and 2025, with expected rates of 6% and 4% respectively, compared to the robust 15% growth experienced in fiscal year 2023.
This slower growth, he noted, lags behind the broader market performance, with the FTSE Bursa Malaysia KLCI (FBM KLCI) anticipated to rise at a quicker pace of 7% in fiscal year 2024.
Chan said several factors contribute to this subdued outlook, including the inability of the net interest margin (NIM) to recover meaningfully, anticipated deceleration in net operating income (NOI) growth and the absence of non-credit costs (NCC) write-backs.
Despite these challenges, he said, valuations within the sector are not deemed excessive, prompting a cautious stance rather than a full-on bearish outlook.
Within its coverage, HLIB Research has assigned a single large-cap 'Buy' rating to Public Bank Bhd with a target price of RM4.80 owing to its defensive qualities and multi-year low foreign shareholding.
Among mid-sized banks, AMMB Holdings Bhd with a target price (TP) of RM4.60 is favoured for its potential dividend payout bandwidth in the near future.
Furthermore, HLIB Research finds Alliance Bank Malaysia Bhd with a target price of RM3.95 appealing among small banks due to its inexpensive valuations.
Leading Indicators Turned Weak
According to Chan, the banking sector statistics for February 2024 highlighted a steady but tempered growth trajectory in system loans, maintaining a positive year-onyear (YoY) increase of 5.8%.
Notably, both household and business segments contributed to this growth, with resilient performances observed across various sub-segments.
However, Chan noted the pace of deposit growth slowed to 4% YoY, signalling a potential shift in market dynamics.
Chan noted that leading indicators have weakened, as evidenced by a decline in loan applications by 11.3% YoY compared to an increase of 39.9% in January, and a drop of 16.8% YoY in loan approvals compared to an increase of 46.1% in January.
Specifically, he noted that both household (HH) and business (Biz) segments experienced decreases in loan applications, with HH decreasing by 14.8% compared to an increase of 36.5% in January and Biz by 6.2% compared to an increase of 45.3% in January.
In terms of loan approvals, he said demand for credit diminished, with HH decreasing by 10.4% compared to an increase of 36.1% in January and Biz contracting by 23.4% compared to an increase of 58.6% in January.
Meanwhile, deposit growth moderated to 4% YoY in February 2024, down from 5.2% in January, primarily due to slower growth in foreign currency and 'other' deposits.
Despite this, the loan-to-deposit ratio for February 2024 remained steady month-on-month (MoM) at 86%, compared to its peak of 89% in February 2018.
The competition for fixed deposits (FD) continues to be fairly rational within the market.
Net Interest Margin Stability
Despite fluctuations in loan and deposit metrics, Chan said the net interest margin (NIM) is expected to exhibit stability in the first quarter of 2024 (1Q24).
This projection hinges on the exit of fixed deposits from a traditionally competitive quarter, suggesting a degree of equilibrium in interest rate dynamics.
Meanwhile, asset quality in the sector remained stable, with February 2024's gross impaired loans (GIL) ratio holding steady MoM at 1.64%.
Although there was a slight decrease of 2 basis points (bps) in the Biz segment, the HH segment experienced a marginal increase of 2bps.
Looking ahead, Chan said there is minimal concern regarding potential deterioration in asset quality.
His confidence stems from the belief that banks are better equipped to handle adverse scenarios compared to previous downturns.
He noted that the substantial loan loss allowances accumulated over the past four years serve as a robust buffer, capable of cushioning any potential spike in the GIL ratio.