PETALING JAYA: Local banks delivered healthy quarterly profit gains for the January-to-March 2023 period.
Going forward, household spending may be more guarded due to inflation and this may skew the banking system loan growth towards business accounts, according to Kenanga Research.
The research firm said April 2023 sector loans grew 4.5% year-on-year, within its 4% to 4.5% target for the year as the month saw slower activities amid Hari Raya festivities.
“While we do anticipate a pick-up going forward, it could be skewed towards business accounts as household spending may be more guarded, undermined by inflation,” Kenanga Research said in a report.
On a month-on-month level, it noted that total system loans were flat as a result of slight increments in household lending, which was offset by a small decline in business loans.
On the business end, it said healthy economic readings may present opportunities for businesses to expand operations in the medium term.
Coinciding with the seasonal softness, it added that there are fewer loan applications.
“This could also be attributed to the comparatively higher borrowing rates arising from the interest rate upcycle, but we believe this could be mostly true at the household front.
“With May 2023 also experiencing an unexpected 25-basis-point hike, this could pause applications for another month.”
Gross impaired loans (GILs) saw a slight increase to 1.78% in April but Kenanga Research said this level is manageable with banks continuing to keep hefty provisions and overlays, even after some selective writebacks as long-term concerns wane.
“On the other hand, we see deposits experiencing a sequential decline, likely also attributed to more festive spending. Fixed deposits may continue to see more favour as rates are now more attractive.
“While the banks are seeking to moderate their offered rates, May’s surprise overnight policy rate (OPR) hike provides room for banks to support margins further,” Kenanga Research said, adding that it did not anticipate further OPR hikes for the rest of 2023.
The research firm said while the recent month’s numbers indicate moderation, it believed the extent could be less severe on a full-year basis in view of seasonal factors.
“Local economic macros still indicate a highly supportive operating environment to elevate household income and economic output, with the first quarter of 2023 gross domestic product at 5.6%.
“However, as headline inflation still appears to be troublesome at 3.3%, the net benefit could be muted.”
As for stock picks, Kenanga Research recommended selective names that offer greater safety nets among peers while avoiding banks with higher non-interest income exposure.
On this note, it likes Public Bank Bhd for being the leading bank in terms of GIL readings at 0.4% (versus peer average of 1.5%), which is backed by a highly collateralised loans book due to a substantial mortgage portion.
“We also like RHB Bank Bhd as we believe the relevancy of strong capital safety will be in the limelight once more. The bank continues to lead with its common equity tier-1 buffers, which stood at 17% versus peers’ average of 14%.”
It said RHB Bank’s dividend prospect is also becoming more promising with targeted payouts of around 55%, translating to yields of 7% to 8%, while its upcoming digital bank with Boost could continue to support interest in the stock.