KUALA LUMPUR (Nov 17): MIDF Research has maintained a positive stance on the banking sector, citing expectations of loan growth recovery and an improving dividend outlook as core drivers, especially after several banks have increased payouts and opted for full cash dividends upon completing their respective capital build operations, said MIDF Research.

According to a research note on Friday, MIDF said the first half of 2023 (1H2023) was a weak period for balance sheet growth as it was largely dragged down by weak corporate drawdowns.

Citing the banking statistics from Bank Negara Malaysia, it said most major loan categories saw a convincing recovery, most notably in business loans (as guided by banks), bolstered by post-election certainty.

Meanwhile, retail loans remain robust, driven by delayed drawdowns in both rental purchases and residential mortgages. 

Increased demand for high-yield credit cards and personal use loans has become more prevalent following heightened cost of fund pressures amid tightening liquidity concerns.

“Bank loan growth targets have been disappointing in certain cases, but all banks seem highly confident in the 2H2023 corporate pipeline. It’s reflected in Bank Negara Malaysia's monthly stats too — working loan applications posted staggering growth post-election,” it said.

While liquidity may have tightened, the research house noted that levels remain comfortable, with expectations that deposit competition will remain rational despite weaker quarterly deposit growth.

“Regardless, repo growth is as strong as it has ever been, with money markets currently being a cheaper alternative to promo fixed deposits. Regardless of tighter liquidity, banks have guided that deposit competition this time should remain rational [several one-offs contributed to last year’s atypical phenomenon],” it added.

On the other hand, the research house suggests that operating expenses (opex), net interest margins (NIM), net operating income (NOII), and asset quality are expected to take a back seat, allowing other factors to dominate the sector's performance.

“Core drivers for now are loan growth and an improving dividend outlook [especially after several banks have increased payouts and opted for full cash dividends upon completing respective capital build operations].

“From a capital gains perspective, we urge investors to be selective with their picks; the lack of foreign participation incentives could dampen popular large and mid-sized banks rerating opportunities in the near term, despite solid fundamentals.

“A soft victory is that major downside risks [asset quality, repeat of atypical deposit competition] seem unlikely in the short term, apart from a few select names. Hong Leong Bank Bhd has added pressure from China's poor macroeconomic outlook. Liquidity may be an issue down the road but is buoyed by elevated interbank lending for now,” it added.

MIDF's top picks were CIMB Group Holdings Bhd with a “buy” recommendation at the target price (TP) of RM6.43 and AMMB Holdings Bhd with a “buy” at RM3.98, considering their potential for capital gains in light of solid fundamentals and positive sector outlooks.

At the time of writing, CIMB traded down one sen, or 0.17%, at RM5.77, giving it a market capitalisation of RM61.54 billion, while AMMB traded up one sen, or 0.25%, at RM 3.94, giving it a market capitalisation of RM13.06 billion.