KUALA LUMPUR: The banking sector is currently lacking zest, meaningful tailwinds, and fresh positive catalysts to significantly spur share prices higher, according to Hong Leong Investment Bank Bhd (HLIB Research).
However, the firm noted that there are no strong, compelling reasons to reduce positions in bank stocks.
"Accordingly, we feel it is too premature to adopt a pessimistic view. After all, valuations are not excessive, and banks are still managing to eke out minor profit growth in financial years 2024–2025 (FY24–25), which is six per cent and four per cent respectively.
"Additionally, a dividend yield of approximately five per cent is quite respectable.
"In turn, we employ a strict stock picking strategy to generate alpha," it said in a note today.
HLIB Research has identified three "buy" recommendations within their coverage, namely Public Bank Bhd, AMMB Holdings Bhd (Ambank Group), and Alliance Bank Bhd.
The firm favour Public Bank for its defensive qualities, multi-year low foreign shareholding, and laggard play potential; Ambank Group for its larger dividend payout bandwidth in the near future; and Alliance Bank for its inexpensive valuations.
In May, loan growth slowed to 5.8 per cent year-on-year (YoY) from April's six per cent, driven by a deceleration in the business segment (4.8 per cent compared to April's 5.6 per cent), while household loans remained steady at 6.5 per cent unchanged from April's 6.4 per cent.
HLIB Research noted that the moderation in business segment growth was influenced by a slowdown in working capital lending, whereas household loans were bolstered by increases in mortgage and auto loans.
Overall, the firm said system-wide loans grew slightly above our full-year FY24 forecast of five per cent to 5.5 per cent YoY, largely due to a low base effect from May 2023.
However, it added that there was notable growth acceleration in the last two months of 2023.
Looking ahead, HLIB Research said if the current monthly growth rate of 0.3 per cent to 0.4 per cent continues until year-end (reflecting the average growth rate from Jan to May 2024), system loans could see further moderation.
"We keep our loan expansion projection for now," it noted.
Meanwhile, the leading indicators showed a slowdown, with loan applications increasing by only 3.1 per cent YoY in May (compared to 13.5 per cent in April), while loan approvals declined by 4.9 per cent (down from 14.4 per cent in April).
Deposit growth remained stable at 4.9 per cent YoY in May (compared to five per cent in April), supported by strong growth in current account savings accounts (CASA) and foreign currency deposits.
Asset quality remained stable in May 2024, with the gross impaired loans (GIL) ratio holding steady at 1.63 per cent month-on-month (MoM).
Household loans improved slightly by three basis points, while business loans increased by the same margin.
"Going forward, we are still not particularly concerned about any potential asset quality deterioration, as we believe banks are better equipped compared to prior slumps; the large loan loss allowances built up over the past four years act as a robust buffer to pad any spike in the GIL ratio," HLIB Research said.
The firm also expects the net interest margin (NIM) to be broadly stable in the second quarter of 2024 (2Q24) since banks are becoming more disciplined in pricing new loans and the competition for fixed deposits is now less intense.