Why is it positive when more people are borrowing?!

Why is it positive when more people are borrowing?!

“Overweight” is positive term or negative term?

There is an analysis by CIMB Securities which has an “overweight” stance on the banking sector. Basically, “overweight” means they are saying it is good to invest into the banking sector because they expect it to do well. How do they come to this conclusion is through the strong loans growth in July 2024. Wait a minute, strong loans growth is good? Is that not more people having more debts? I thought we are supposed to have a low household debt for the economy to be healthy, right? 🙂

Perhaps I asked three questions for us to understand better?

1. Do companies expand their business if they don’t think the near future is bright?
2. Do people buy assets (okay, including cars even if this is a depreciating asset) when they do not think too positive about the near future?
3. When businesses expand or when people buys assets, do they take up loans or they pay cash?

Why businesses expand why people borrow

Let me now answer the questions above. Companies will seek to expand when they know their investment will most likely be successful. People will buy assets (or cars) when they think their job is secure, they think everything will be fine. These businesses and also the people, they will NOT be paying cash, they will take up loans. This is why the loans will grow when both businesses and people think of their future as brighter and better.

Could the assessment be wrong?

Could all these businesses and people be wrong in their assessment? Well, businesses look at their business volume and people look at their job security and also potential earnings. So, if they are wrong, then it must be due to some unforeseen circumstances. If it is due to unforeseen circumstances, then of course no one can predict yeah. For example? ASEAN Financial Crisis 1997/98. Another example? COVID-19 in 2019 (obviously from the -19 in Covid word).

Article in nst.com.my. CIMB Securities maintained an “overweight” stance on the banking sector following strong loan growth of 6.4 per cent in July 2024.

The research firm said leading loan indicators accelerated strongly in July 2024, supported mainly by the household segment. 

It stated that the growth indicates that the household segment seemed to have shrugged off the uncertainty arising from the diesel rationalisation plan from June 10, 2024. 

“Gross impaired loans was stable in July 2024, marginally better by 0.8 per cent lower or declined RM293 million month-on-month (mom).

“The gross impaired loans ratio was unchanged at 1.6 per cent in July 2024, versus 1.6 per cent in June 2024,” it said. 

The firm added that the loan loss cover continued to strengthen to 91.8 per cent in July 2024 from 91.7 per cent in June 2024. Please refer to the full article with a lot more information here: Article in nst.com.my.

Can buy banking stocks if we also believe this analysis by CIMB Securities

At the moment, I do not have any banking stocks. Used to own CIMB and Maybank but has sold them some time back. So, do your homework, look at the potential earnings and which should drive up the share price too. As for dividend returns, it would really depend on what price you enter yeah. If you enter earlier, your dividend returns in percentage points could be higher. However, if it’s capital appreciation, then the dividend will just be an extra gain versus the focus. Happy investing.