KUALA LUMPUR (Sept 1): Kenanga Investment Bank Bhd remains confident that banking stocks will stay resilient in a rising interest rate environment, lifting the overall profitability of the sector.

In a note on Thursday, Kenanga said the current readings also indicate that the industry's loan growth will remain supported by more buoyant economic activities due to the catch-up with reopening of borders.

"The banks will also benefit from lower impairment allowances as asset quality risks diminish, leading to lower provisions," it said.

As such, Kenanga maintained its "overweight" call on the banking sector, with top picks leaning towards dividend counters to shelter against uncertainties — Malayan Banking Bhd (Maybank) and Affin Bank Bhd.

"In terms of top picks, we still like Maybank, which we highlight for its stellar dividend returns (7% to 8%) paired by its commendable asset quality readings in spite of being the leader in loans and deposits share," it said.

For the smaller cap banks, it believes Affin Bank presents opportunities with the return of earnings growth prospects, thanks to its Affinity in Motion initiatives.

On loan growth, the investment bank also said July 2022 system loans grew by 5.9% year-on-year (y-o-y), beating its expectation, after which it raised the 2022 industry growth target to between 5.5% and 6%.

"Household loans continued to increase but we believe it could taper off slightly on higher interest rates in subsequent months. This is also indicative of the slowing applications here while business loans remain supported by increasing working capital requirements," it said.

Concurring with Kenanga, CGS-CIMB Securities Sdn Bhd also reiterated an "overweight" call on the sector, with potential re-rating catalysts from strong growth in net interest income in 2022 and 2023, underpinned by robust loan growth, hikes in overnight policy rate, and downtrend in loan loss provisioning.

Meanwhile, it also projected a loan growth of 5% to 6% for the sector in 2022 in line with the industry's loans, which expanded by 3% from December 2021 to July 2022, translating into an annualised growth rate of 5.2% for this year.

"The robust loan applications and approvals in July 22 would help to support the industry's loan growth, which we expect to be around 6% y-o-y in the next one to two months," it added.