Banking sector’s loan growth may pick up on steady OPR

PETALING JAYA: Loan growth in Malaysia will likely pick up in the latter part of this year in tandem with expectations that the overnight policy rate (OPR) would remain steady for the remaining part of 2023.

This growth spurt will likely lift the full-year loan growth number to 4.5% to 5% for 2023, according to Hong Leong Investment Bank (HLIB) Research.

Data from Bank Negara last Friday showed that loan growth had remained steady at 4.2% in August 2023, following a 4.2% growth in the preceding month.

For the household segment, the growth was broad-based across all sub-segments while for the business segment, it was led by working capital and non-residential property lending.

“Overall, system loan growth was just slightly below our full-year expectations of 4.5% to 5%, but we expect a pick-up in late second half of 2023,” HLIB Research said.

Meanwhile, TA Research revised down its loan growth expectations, after noting that the number had continued to fall short of its relatively more bullish forecast for this year.

“Loan growth continues to trail behind our forecast of 5.5% for 2023. As such, we revise our loan growth projections to 4.8%,” the brokerage said.

Both HLIB Research and TA Research maintained their “neutral” stance on the banking sector.

HLIB Research explained that its view was that the present risk-reward appeared more balanced as there were no new positive catalysts to spur banks’ share prices significantly higher.

“Also, we are projecting 2024 and 2025 sector profit to grow at a slower rate of 5% and 4%, respectively, versus 13% in 2023, which lags the broader market as well, as the FBM KLCI is seen to rise at a quicker 8% in 2024,” it said.

It added that the lacklustre growth expectations for 2024-2025 were due to the sector’s net interest margin (NIM) being unable to recover meaningfully, non-interest income growth to slow and the absence of net credit cost write-backs.

“Regardless, valuations are not excessive and hence, we feel it is too premature to turn full-on bearish,” HLIB Research said.

TA Research, on the other hand, said the sector’s 2023 earnings would likely be dampened by more moderate loan growth, NIM compression, lacklustre fee income and rising overhead expenses.

“Nevertheless, on a positive note, we foresee sector earnings to be supported by healthier investment income, a benign asset quality outlook, and ample capital and liquidity reserves in the banking system.

“Other potential downside risks in 2023 include uncertainties surrounding the ongoing geopolitical tensions, competition, growing inflationary pressures and rising interest rates, which could pose challenges for the sector,” it added.

Also “neutral” on the banking sector, RHB Research said the industry’s earnings growth was expected to normalise heading into 2024.

It noted that while loan growth was steady in August, lending indicators were softer with lower loan applications and approvals, partly due to a higher base last year.

“We maintain our 2023 system loan growth forecast at 4% to 4.5%,” RHB Research said, noting that on a year-to-date basis, system loans had grown 2.3%.

Its top sector picks are CIMB Holdings Bhd, Hong Leong Bank Bhd and AMMB Holdings Bhd.

Meanwhile, Kenanga Research maintained “overweight” on the banking sector.

It argued that August 2023 loan growth of 4.2% remained in line with its 2023 target of 4% to 4.5%, even as economic prospects were expected to remain gradual from here on, with its in-house gross domestic product growth target standing at 3.7% for 2023.

“While we maintain our optimism on the sector on better overall forward macros, we believe investors may still be highly selective in their long-term picks,” Kenanga Research said.

“Plotting our projections into a sector matrix, we had filtered our top picks to be banks that are underappreciated despite their respective growth prospects in both dividends and return on equities,” it added.

It cited CIMB, AMMB and Alliance Bank Malaysia Bhd as its top picks.