Investment Highlights

• Industry loan growth decelerated to 3.5% YoY in Jan 2020 (Dec 2019: 3.9% YoY). The moderation in the system loan growth was contributed by a slower non-household loan growth to 2.0% YoY (Dec 2019: 2.0% YoY) while household loan growth slipped to 4.5% YoY, 20bps lower than the previous month. Repayments outpaced disbursements in Jan 2019, reversing ythe trend seen in Dec 2019. For 2020, our loan growth projection is unchanged at 4.0%.

• Slowdown in loan applications and approvals in Jan 2020. Jan 2020 saw a slower pace of loan applications and approvals for both the household and non-household sectors.

• Headwinds ahead on banks’ interest income with potentially another interest rate cut of 25bps in 1H 2020. Following the announced OPR cut of 25bps on 22 Jan 2020, the sector's weighted base rate and average lending rate declined to 3.42% and 5.02% respectively. Also, the BLR was reduced to 6.50%. We expect NIMs of banks to be compressed again in 1Q20 though mitigated partially by the marked-to-market gains on banks’ securities due to the compression in bond yields. In Jan 2020, the 10- year MGS yields declined by 18bps to 3.13% as investor sentiment was impacted by the Covid-19 outbreak leading to a higher risk aversion.

• Expect another cut of 25bps, reducing the OPR further to 2.50% from 2.75% in 1H 2020 after the Jan 2020 rate reduction of 25bps. The market appears to have priced in another rate cut of at least 25bps based on the difference in rate between the interest rate swap and KLIBOR. We expect a further cut in OPR by 25bps either today (3 March 2020) after the monetary policy committee (MPC) meeting or the next MPC meeting on 5 May 2020. We have already pencilled in the impact of a 50bps rate reduction into the earnings of banks. Regionally, Thailand and the Philippines have instituted rate cuts with the latest Indonesia cutting its benchmark interest rate by 25bps to 4.75% to counter Covid-19 from slowing down the economic growth.

• Higher impaired loans and provisions in Jan 2020. The industry’s outstanding impaired loans in Jan 2020 increased by 2.8% MoM or RM761mil. This has raised the industry’s total GIL ratio back to 1.6% while NIL ratio rose to 1.00% vs. 0.96% in the previous month. Total provisions for the sector were marginally higher by 0.3% MoM or RM73.4bil.

• Rerated CIMB to HOLD from BUY and downgrading the sector to NEUTRAL from OVERWEIGHT. In the recent results reporting season, we have downgraded CIMB to a HOLD on weaker 4Q19 numbers and lower ROE for FY20 after imputing the impact of another rate cut of 25bps. There remains downside risk to the economic growth from: i) unresolved US and China trade tensions though the signing of phase one deal; ii) Covid-19 if the virus outbreak will be a protracted one; and iii) domestic political uncertainties. With these uncertainties, we favour banks with: i) lower foreign shareholdings for stability; ii) higher dividend yields; iii) larger securities book to benefit from marked-to-market gains with the decline in bond yields to mitigate the OPR cuts on NIM; iv) the ability to recover fast from repricing of deposits to lower rates from cuts in benchmark interest rates; and v) stable asset quality (higher security coverage for loans). Our top picks are Maybank (FV: RM9.50/share), RHB Bank (FV: RM6.30/share) and Hong Leong Bank (FV: RM17.50/share). Maybank, RHB Bank and Hong Leong have lower foreign shareholdings of 19.3%, 21.4% (excluding Aabar’ stake of 4.23%) and 11.4% respectively compared to Public Bank (32.8%), and CIMB (30.4%).

Source: AmInvest Research - 3 Mar 2020