Investment Highlights

• Industry loan growth was sustained at 4.0% YoY in Apr 2020 with higher non-household loans offset by a slowdown in household loans. Growth in household loans slipped further to 3.3% YoY while non-household loan growth climbed to 5.1% YoY compared to 4.4% YoY in the preceding month. YTD loans grew by 2.4% annualised. We continue to expect a low single-digit loan growth of 2.0% for the sector in 2020. Apr 2020 saw lower disbursements and repayments for household and non-household loans due to the implementation of the movement control order and automatic moratorium for individual and SME loans.

• Loan applications and approvals registered higher contraction YoY in Apr 2020. Apr 2020 saw lower levels of household and non-household loan applications. On approvals, the level for the non-household sector increased compared to the preceding month while that of household loans declined. We believe that the increase for non-household sector has been contributed by the rise in approvals of SME relief loans to ease borrowers’ cash flows.

• Banks’ interest income will be impacted by the 50bps OPR cut announced on 5 May 2020. The sector's weighted base rate was sustained at 3.18% in Apr 2020 while the weighted average lending rate declined further by 11bps to 4.77% after the central bank announced a further reduction to the OPR by 25bps on 3 Mar 2020. The BLR was steady at 6.26%. 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) fell to 2.22%. NIMs of banks will be further compressed in 2Q20 owing to the recent 50bps reduction in benchmark interest rate on 5 May 2020. As of now, we do not see any signs of further cuts in OPR. 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. Banks are still in discussions with the regulators and auditors to come up with a resolution for the modification loss.

• Slight increase in deposit growth with a strong expansion of industry CASA. Industry deposit growth rose slightly to 2.8% YoY due to a rise in individual deposit growth to 6.2% YoY. LD ratio for the sector eased to 88.4% from 88.7%.

• Impaired loans declined MoM but provisions rose. The industry’s total GIL was sustained at 1.6% while NIL ratio was steady at 1.0%. Total provisions for the sector increased by 3.2% MoM or RM738mil which we believe was due to preemptive provisioning buffers set aside by banks for the potential impact of Covid-19. The sector’s loan loss cover improved to 84.9%

• Retain our NEUTRAL stance on the sector. We continue to be selective on stocks with BUYs on Maybank (FV: RM8.30/share), RHB Bank (FV: RM5.80/share) and Hong Leong Bank (FV: RM15.60/share).

Source: AmInvest Research - 2 Jun 2020