KUALA LUMPUR: Hong Leong Investment Bank Bhd (HLIB) anticipates that banking sector profits will grow at a slower rate of six per cent in the financial year 2024 (FY24) and four per cent in FY25, compared to 15 per cent in FY23.
The firm said this growth lags behind the broader market, with the FBM KLCI expected to rise by a quicker seven per cent in FY24.
"This slower growth is attributed to the net interest margin (NIM) being unable to recover meaningfully, a slowdown in non-interest income (NOII) growth, and no write-backs in net credit costs (NCC)," it said in a note.
Regardless, HLIB stated that valuations are not excessive; therefore, the firm believes it is too premature to turn fully bearish.
Currently, the firm has pointed out that it only holds a single large-cap stock, Public Bank Bhd, with a 'Buy' rating under its coverage and a target price of RM4.90, citing its defensive qualities and multi-year low foreign shareholding.
For mid-sized banks, the firm favours AMMB Holdings Bhd (Ambank Group) with a target price of RM4.60, emphasising its anticipated dividend payout potential in the near future.
For small banks, the firm favours Alliance Bank Bhd, with a target price of RM4.10, attributing its preference to its inexpensive valuations.
HLIB has maintained a "neutral" stance on the overall banking sector, adding that the risk-reward ratio is now more balanced as there are no new positive catalysts to spur share prices significantly higher.
Meanwhile, HLIB said April's loan growth remained steady at six per cent year-on-year (YoY), fuelled by both household (HH) and business segments, which increased 6.4 per cent and 5.6 per cent respectively.
"In HH, it was a robust showing across all sub-segments. For business, the expansion was led by working capital and investment-related credit.
"Overall, system loan growth beat our full-year FY24 forecast of +5.0–5.5 per cent YoY, but it was due to the low base effect in April 2023. We note that in the last two months of 2023, it showed a growth spurt.
"Hence, the increase in system loans could taper later on if it still rises at the 0.3–0.4 per cent month-on-month (MoM) pace till year-end (the average growth rate for January–April 2024).
"We keep our loan expansion projection for now," it added.
HLIB also noted that leading indicators rebounded, with loan applications increasing by 14 per cent YoY and loan approvals rising by 12.8 per cent YoY.
Deposit growth held steady at five per cent YoY, backed by robust current account savings accounts (CASAs) and foreign currency deposits.
Asset quality stayed relatively constant, seeing that April 2024's gross impaired loans (GIL) ratio stood at 1.63 per cent.
Looking ahead, HLIB stated that it remains unconcerned about potential deterioration in asset quality, as the firm believes banks are better equipped compared to previous slumps.
It said the significant loan loss allowances accumulated over the past four years serve as a robust buffer to cushion any increase in the GIL ratio.
The firm also expects NIM to expand in the second quarter of 2024 (2Q24), as banks are becoming more disciplined in pricing new loans and competition in fixed deposits (FD) is now less intense.