Investment Highlights

• Industry loan growth increased to 3.9% YoY in Feb 2020 (Jan 2020: 3.5% YoY). This was contributed by higher nonhousehold loan growth of 3.2% YoY (Jan 2020: 2.0% YoY) supported by lower repayments. Meanwhile, outstanding household loan grew slightly slower at 4.4% YoY (Jan 2020: 4.5%YoY). Growth of disbursements outpaced repayments in Feb 2020. Moving ahead, we expect the system loan growth to taper. This is due to the Covid-19 outbreak impacting businesses which are likely to result in a drop in loan demand. We expect banks to be less aggressive in expanding their loan books ahead. Financial institutions are likely to focus on actively restructuring and rescheduling loans of borrowers impacted by the pandemic virus. This is in addition to providing automatic moratoriums to individual and SME borrowers to defer their repayments by 6 months. We see that this will prevent loans from falling into to impaired status significantly after the end of the moratorium.

• Higher levels of loan applications and approvals in Feb 2020. Feb 2020 saw an increase in the levels of applications and approvals for both household and non-household sector loans.

• Still headwinds ahead on banks’ interest income with potentially another rate cut of 25bps in May 2020. Following the announced OPR cut of 25bps on 22 Jan 2020, the sector's weighted average lending rate declined further to 4.98% in Feb 2020 while the weighted average base rate was unchanged at 3.43%. BLR dipped 2bps to 6.48% compared to 6.50% in Jan 2020. In Mar 2020, the BLR, weighted base rate and average rate will decline further as BNM has lowered the OPR by another 25bps to 2.50% on 3 Mar 2020. The average deposit rate (the average rates for FDs of up to 1-year tenure) fell to 2.70%. Interest spread (difference between weighted average lending rate and average FD rate) decreased by 1bps to 2.28%. NIMs of banks will be compressed in 1Q20 owing to the two OPR cuts on the 22 Jan 2020 and 3 Mar 2020.

• Deposit growth eased slightly with a stable LD ratio of 89.0%. Industry deposit growth shrank slightly to 2.8% YoY. Growth of deposits from individuals moderated to 5.0% YoY while that of business enterprises registered a higher contraction of -1.1% YoY compared -0.9% YoY in the preceding month. We do not expect much competition for deposits ahead as banks are unlikely to be aggressive in expanding loans amidst the global economic slowdown.

• Still upticks in impaired loans but lower in quantum than in Jan 2020. The industry’s outstanding impaired loans in Feb 2020 increased by 1.2% MoM or RM321mil, which was lower than the rise in Jan 2020 of 2.8% MoM or RM761mil. By loan purpose, the rise in was largely driven by higher impairment of mortgages, personal loans, loans for purchase of securities and working capital financing. The industry’s total GIL was sustained at 1.6% while NIL ratio was steady at 1.01%.

• Retain our NEUTRAL rating on the sector with a downgrade in recommendation for Alliance Bank to HOLD from BUY. We are downgrading our call on Alliance to HOLD as the share price has surged to our fair value of RM1.90/share. Our top picks are Maybank (FV: RM8.60/share) and RHB Bank (FV: RM5.80/share). Also, we like Hong Leong Bank (FV: RM15.90/share) for its strong security coverage for loans, low foreign shareholdings of 10.7%, faster recovery from OPR cuts and its valuation, which is now trading at a low FY21 PB/V of 0.9x, well below the 2008–2009 trough valuation of 1.5x P/BV.

Source: AmInvest Research - 1 Apr 2020