Investment Highlights

• Industry loan growth rose further to 4.0% YoY in Mar 2020 (Feb 2020: 3.9% YoY) contributed by higher non-household loans. Growth in household loans slipped to 3.7% YoY while non-household loan growth climbed to 4.4% YoY compared to 3.2% YoY in the preceding month. YTD loans grew by 2.8% annualised. We continue to expect a low single-digit loan growth of 2.0% for 2020 on the Covid-19 pandemic, weakness in oil prices and domestic politically uncertainties. We expect the industry loan growth to still be positive with relief funding, particularly BNM’s special relief facility to be granted to alleviate cash flow constraints of SMEs caused by the outbreak of the virus. We expect the industry loan growth to taper ahead owing to the MCO which has impacted production and spending. Additionally, labour market conditions have also weakened. Mar 2020 saw higher loan disbursements compared to Feb 2020 for most segments including manufacturing and transportation.

• Lower levels of loan applications and approvals in Mar 2020. Mar 2020 saw lower levels of applications and approvals for household loans. Meanwhile, loan applications and approvals for the non-household sector increased compared to the preceding month. We believe that this is related to requests for SME relief loans as aforementioned.

• Banks’ interest income will be impacted by the 50bps OPR cut announced on 5 May 2020. The sector's weighted base rate declined 25bps to 3.18% in Mar 2020 while the weighted average lending rate dropped 21bps to 4.77% after the central bank announced a further OPR cut of 25bps on 3 Mar 2020. The BLR decreased 22bps to 6.26% compared to 6.48% in Feb 2020. In May 2020, the base lending rate, weighted base rate and average rate will decline further as BNM lowered the OPR by another 50bps to 2.00%. The average deposit rate (the average rates for FDs of up to 1-year tenure) decreased to 2.45%. Interest spread (difference between weighted average lending rate and average FD rate) was 2.32%. NIMs of banks will be compressed in 1Q20 and 2Q20 owing to YTD OPR reduction of 100bps in total. Additionally, the moratorium granted on loan repayments for 6 months (1 April to 30 Sept 2020) will result in a one-off day 1 modification loss adjustment to banks interest income in 2Q20 in line with MFRS 9. However, we believe that the impact will be manageable with the loss adjustment eventually reversing out as the loans progress towards the remaining tenor after the moratorium.

• Deposit growth eased slightly with a stable LD ratio of 89.0%. Industry deposit growth shrank slightly to 2.7% YoY owing to a higher contraction in growth of business deposits to 1.7% YoY. Growth of deposits from individuals improved to 5.3% YoY.

• Further upticks in impaired loans but asset quality ratio remained stable. The industry’s outstanding impaired loans in Mar 2020 increased by 1.6% MoM or RM432mil higher than the rise in Feb 2020 of 1.2% MoM or RM321mil. By loan purpose, the increase was largely driven by higher impairments of mortgages, personal loans, loans for purchase of securities, credit cards and financing for construction. By sector, the upticks in impairments were from all segments except utilities and construction.

• Retain our NEUTRAL stance on the sector. We continue to be selective on stocks with BUYs on Maybank (FV: RM8.50/share), RHB Bank (FV: RM5.70/share) and Hong Leong Bank (FV: RM15.90/share).

Source: AmInvest Research - 8 May 2020