Banks contend with higher loan-to-deposit ratios

PETALING JAYA: Amid earnings that hit another new quarterly high, local banks are being confronted with higher loan-to-deposit ratios (LDR).

Analysts pointed out that the sector’s LDR rose to 95.2% in June from 93.6% in March, which could likely result in a widespread increase in deposit competition.

CIMB Securities in a report to clients said the other possibilities of a higher LDR is a slower upgrade in loan growth and a pick-up in bond issuances as an alternative to loans.

“This may lead to higher fee income and bodes well for banks with large bond and treasury divisions,” it said.

The research house said most of the banks it tracked posted second-quarter (2Q24) net profits that were above expectations.

“Sector earnings hit another new quarterly high, with 2% quarter-on-quarter (q-o-q) and 10% year-on-year (y-o-y) increase, the only blemish was higher LDR in 2Q24.

“This is the highest level since September 2018’s 94%.”

In the report, CIMB said it was nevertheless upgrading the sector’s earnings growth forecast to 10% from an earlier 7% for this year, and 6% from 2% for next year.

It said while higher LDR could lead to a widespread increase in deposit competition, mainstream banks have continued to lower one-year promotional fixed deposit rates to 3.5%-3.6% levels from 3.9% per annum early this year and a peak of 4.2% more than a year ago in the first half of 2023.

The only banks which were currently offering fixed deposit promotion rates of 3.8% and above were some foreign and smaller Islamic and development banks, it noted.

“Further, half of these higher-priced fixed deposit promotion rates are for shorter tenures of only six months and not one year.

“Thus, we believe deposit pricing discipline will likely be sustained.”

On the likelihood of slower loan growth, CIMB Securities said its loan growth forecast of 6.1% y-o-y for 2024 was still conservative and lower than the 7.3% y-o-y rate achieved by the sector in 2Q24.

“Further, the overall system LDR of 86.8% in June and 87.6% in July are still lower than the sector’s 95.2%, and still supportive of loan growth.

“Sector excess deposits remain ample at RM314bil.”

On the whole, it said it did not foresee major concerns over the higher LDR in 2Q24.

“We maintain our ‘overweight’ stance with further rerating catalysts being non-interest income bond gains, with estimated average earnings upgrade of around 6% for every 50-basis-point drop in bond yield, and a possible uplift to loan growth, with the sector two-year forward earnings upgrade of around 5% for every two percentage point higher loan growth.”

Key risks, it noted, were higher-than-expected cost of funds, outflow of liquidity and worse-than-expected asset quality.

CIMB Securities said its top picks in the sector remained Hong Leong Bank Bhd, followed by AMMB Holdings Bhd and Malayan Banking Bhd.