HLIB Research maintains 'neutral' call on banking sector

KUALA LUMPUR: Hong Leong Investment Bank (HLIB) Research is keeping its 'neutral' rating on the local banking sector, citing a more balanced risk-reward scenario due to the absence of fresh catalysts to drive share prices notably higher.

It said that the projected banking sector's profit growth for the fiscal years 2024/2025 is slower at 6.0 per cent and 4.0 per cent respectively, compared to 15 per cent in the previous year.

This lags behind the broader market's expected 7.0 per cent rise in the current year, it said in a note.

HLIB attributed this to challenges such as the net interest margin (NIM) being unable to recover significantly, slower growth in net operating income (NOII), and the absence of net credit cost (NCC) write-backs.

The investment bank noted that valuations are not considered excessive, leading to a reluctance to adopt a fully bearish outlook at this time.

Meanwhile, HLB said it is maintaining its current projection for loan growth.

Loan growth has accelerated to 6.0 per cent, up from 5.8 per cent in February, driven by growth in both household and business segments, it said.

HLIB said this beats its full year financial year (FY24) forecast of 5.0 per cent to 5.5 per cent year-on-year (YoY), due to the low base effect in March 2023.

"We note that towards the last two months of 2023, it showed a growth spurt," it said in a note.

According to HLIB Research, household loans increased by 6.3 per cent (compared to a 6.2 per cent increase in February), while business loans grew by 4.9 per cent (compared to a 4.8 per cent increase in February).

In households, it was a robust showing across all sub-segments. For business, the growth was led by investment-related credit, said the investment bank.

"If the rate of loan growth continues at the pace of 0.4 per cent to 0.5 per cent month over month (MoM) until the end of the year (which is the average expansion rate for January-March 2024), the increase in system loans may slow down later," it added.

However, the investment bank said leading indicators remained weak, although the gross impaired loans (GIL) ratio remained steady.

"Household and business loan applications and approvals have decreased, indicating a restrictive lending environment," said HLIB.

HLIB said deposit growth has also picked up momentum, driven by stronger current and savings accounts (CASAs) and foreign currency deposits. 

"The loan-to-deposit ratio remained stable, suggesting a balanced situation. Overall, competition for fixed deposits remains reasonable,"  it added.

Additionally, the NIM is expected to remain stable in the first quarter of 2024 (1Q24) as fixed deposits exit a seasonally competitive period.

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