PETALING JAYA: Analysts are maintaining their optimistic stance on the local banking sector, buoyed by factors including an expected resumption of net interest income growth in 2024.
They also believed that the defensive nature of the industry could see investors flocking in for safety amidst slowing economic prospects in other sectors.
In a note published yesterday, CGS-CIMB Research said sector valuation and dividend yield remains attractive, although it did acknowledge that the industry’s loan growth has seen further slowing down, decelerating from 4.4% year-on-year (y-o-y) in June to 4.2% in July.
The research unit attributed the loans pullback to a drag on business loans growth which fell from 0.7% y-o-y in June to an almost flat 0.2% a month later.
This can likely be a reflection of the weak business sentiment then, as most businesses adopted a wait-and-see stance in their plans ahead of the state elections in six states on Aug 12.
At the same time, CGS-CIMB Research reported that household loan momentum inched up from 5.1% y-o-y as at end-June 23 to 5.2% y-o-y at end-July 23.
“We are not overly concerned about the weakening loan growth as we do not expect loan growth in 2023 to be far below our projected 4% to 5%.
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“Every percentage point cut in our loan growth projection will only reduce our net profit forecasts by approximately 0.8%, based on our estimates,” it said.
Furthermore, it added that among household loans, the momentum for residential mortgages and auto loans remained strong, inching up to 6.9% y-o-y and 8.9% y-o-y, respectively, as at the end of July.
The research outfit believes that these two segments are key towards supporting the growth of not only household loans, but also total loans in the banking industry.
Meanwhile, Kenanga Investment Bank Research opined that while asset quality concerns may still arise, most of the larger banks in the country have maintained a highly selective and strict credit assessment, not compromising for larger market share.
Noting that although industry dividend yields have moderated to mid-5% from mid-6%, it believes that this could still be attractive to long-term investors given the safety net offered by the sector.
“We continue to see the easing of net interest margins post the overnight policy rate spurring deposits competition, but with stabilisation already showing for certain names on a quarter-on-quarter basis.”
Despite hints of softening economic activities, Kenanga Research said banks continued to see loan expansion with persistent support from mortgages.
“However, we note that this was led by a shift from secondary market to affordable primary market units, which could hint that household spending may still be gradually pinched,” said Kenanga Research.
To counteract the decline in fund-based income, the securities firm pointed out that banks had mostly been able to offset this with better traction in the non-interest income space, with foreign exchange gains being a notable contributor.
On top of that, it is of the view that US Federal Reserve rates are likely leaning towards long-term stabilisation with several anecdotes of hawkishness coming to an end as inflation comes under control.
As such, Kenanga Research is recalibrating its risk-free rate input in its Gordon Growth Model (GGM) inputs to 4% from 4.5%. The GGM refers to a formula used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate.
Notably, after observing the market breakdown over the second quarter of the year, Kenanga Research said domestic players continued to gain a wider share at 81.7% of the industry. It said this could be a result of less aggressive efforts from foreign peers, likely as they refocus their priorities on the back of regional rate movements.
“For now, we believe our industry growth target of 4% to 4.5% should be intact despite a softer in-house gross domestic product outlook of 3.7% for 2023, as we continue to anticipate strength in the affordable housing markets which could support slow business activities.”
Its top banking pick is CIMB Group Holdings Bhd (with a target price of RM6.30); while CGS-CIMB Research selected RHB Bank Bhd as its top choice for the sector, with a target price of RM6.56.