Kenanga Investment Bank (Kenanga) reported today that Malaysia's banking sector experienced robust growth in May 2024, with system loans increasing by 5.8%, aligning closely with their CY24 projections amidst sustained demand for mortgages and hire purchase accounts. Business loans, particularly from the retail and service sectors, also saw an uptick, likely driven by improved consumer spending and the economic outlook.

The sector anticipates the Overnight Policy Rate (OPR) to remain stable at 3% throughout CY24, reflecting a cautious stance with potential downward pressures. Kenanga maintains an OVERWEIGHT recommendation on banking stocks, bolstered by expectations of continued resilience supported by infrastructure projects and investment initiatives.

Household loans showed resilience, expanding by 6.5% in May 2024, primarily led by residential properties and transport vehicles. In contrast, business loans grew by 4.8%, driven by increased working capital needs, particularly evident in the service industries. Despite a flat month-on-month performance for business loans, sustained growth in household loans underscored ongoing demand for mortgage and home purchase financing.

Loan applications in May 2024 edged up by 3% year-on-year, rebounding from the previous month's festive season dip. Mortgage applications continued to drive growth, highlighting persistent demand for affordable housing solutions amidst favourable financing conditions.

The Gross Impaired Loan (GIL) ratio remained stable at 1.63%, reflecting a healthy asset quality environment across the banking industry. However, industry loan loss coverage moderated to 90.8%, indicating a measured approach towards managing risks, particularly among SMEs facing inflationary pressures.

Stable growth in deposits was observed, with system deposits increasing by 4.9% year-on-year and 0.45% month-on-month in May 2024. Current Account Savings Account (CASA) balances held steady at 28.5%, supporting liquidity management despite slightly lower interest rates on fixed deposits.

Kenanga reiterates its OVERWEIGHT stance on the banking sector, citing ongoing loan growth, an improved GDP outlook, and enhanced margin retention capabilities amidst macroeconomic challenges. The sector remains attractive, with dividend yields ranging from 6% to 7%, offering stability amid market volatility.

Top picks for Kenanga in the banking sector for 3QCY24 include CIMB, expected to sustain its growth momentum with a robust return on equity (ROE) and attractive dividend yield. RHB is favoured for its leading dividend prospects, projected at 7%–8% among peers, while ABMB stands out as a small-cap favourite due to its strong fundamentals and competitive positioning.

For investors eyeing Malaysia's banking sector, Kenanga's outlook underscores a favourable investment climate supported by solid financial metrics and strategic growth prospects.