KUALA LUMPUR (Jan 16): Local banks will likely remain a safe haven amid recessionary concerns on “better near-term earnings growth security”, said Kenanga Investment Bank Bhd. 

The research house said demand for loans should continue to be supported by more working capital needs, while interest rate upcycles should bolster margins.

“We expect normalisation in the second half of the year should there be no further hikes beyond the anticipated 25-basis-point (bps) bump in January 2023,” it said. 

On the flip side, Kenanga Research said banks are preparing against possible erosion in asset quality if inflationary pressures get the best of the market.

“Still, we reckon present buffers are sufficient, with hopes of write-backs, should the above anxieties prove to be lacking.

“That said, the longer-term outlook for the sector hinges on gross domestic product outperformance to keep loan growth upbeat, amid possible margin reversion, as rate competition brews,” it added. 

The research house expects a “steady-state” overnight policy rate (OPR) at 3.00%.  

“While the US Federal Reserve had a very hawkish bearing on the federal funds rate (3.75%-4.00%, after hikes of 375 bps in 2022), Bank Negara Malaysia (BNM) has been relatively moderate with OPR hikes (2.75%, after hikes of 100 bps in 2022), and we expect monetary tightening to halt in the coming quarters.

“[For BNM,] we anticipate one final 25 bps hike in the January 2023 Monetary Policy Committee meeting,” it added. 

The research house said the domestic economy will still face inflationary pressures, but “perhaps at a lesser extent compared to regional counterparts, thanks to broad-based improvements in output (led by manufacturing and service industries)”.

“Due to this, we believe BNM may take a more observatory position on the laggard impact of interest rates on private consumption before deciding its next move.

“While we are hopeful for further correction in the global supply chain to rebalance trade, the leading catalyst for prosperity would be a complete reopening of China to drive the commodity market and fuel further manufacturing output,” it continued. 

Kenanga Research anticipates industry loan growth to come in at 4.0-4.5% in 2023, against 2022’s anticipated close at 5.5-6.0%.

Its top picks for the first quarter of this year are Malayan Banking Bhd (Maybank), with a target price (TP) of RM10.40, CIMB Group Holdings Bhd (TP: RM6.40), Alliance Bank Malaysia Bhd (RM4.20), and Public Bank Bhd (RM4.70). The research house has upgraded its call on Public Bank to "outperform".