Investment Highlights

• Industry loan growth moderated to 3.9% YoY in May 2020 attributed to a slowdown in household and non-household loans. Growth in household loans slipped further to 3.2% YoY while non-household loan growth decreased to 4.9% YoY compared to 5.1% YoY in the preceding month. YTD loans grew by 2.4% annualised. May 2020 saw a continuation of slow disbursements and repayments for household and non-household loans due to the implementation of the movement control order (MCO) and automatic moratorium for individual and SME loans.

• Loan applications and approvals remained slow and contracted YoY in May 2020. The levels of household applications remained low compared to that prior to the MCO while non-household loan applications fell compared to the preceding month. Loan approvals continued to be sluggish.

• Banks’ interest margins will be impacted by the 50bps OPR cut announced on 5 May 2020. May 2020 saw the sector's weighted base rate and average lending rate slipped by 50bps and 33bps to 2.68% and 4.34% respectively after the central bank announced a further reduction to the OPR by 50bps on 5 May 2020. The BLR fell 48bps MoM to 5.78%. Interest spread (difference between weighted average lending rate and average FD rate) stood at 2.40%. NIMs of banks will be further compressed in 2Q20 owing to the 50bps reduction in benchmark interest rate. We are still monitoring the interest swap rates, and the market have yet to price in another rate cut of 25bps on 7 July 2020 (next MPC meeting). 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 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 unwinding. The concessionary funding for loans to assist SMEs impacted by Covid-19 that allows a healthy spread to be earned by banks is envisaged to be able to partly mitigate the day 1 modification loss.

• Sustained deposit growth with continued expansion of industry CASA. Industry deposit growth was sustained at 2.8% YoY while LD ratio for the sector was stable at 88.7%.

• Impaired loans declined MoM but provisions continued to rise. The industry’s total GIL was sustained at 1.6% while NIL ratio was steady at 1.0%. Total provisions for the sector continued to rise by 3.5% MoM or RM844mil, which we believe was due to pre-emptive provisioning buffers set aside by banks for the potential impact of Covid-19. The sector’s loan loss cover improved to 89.0%. Excess capital buffer remained healthy at RM120bil to withstand any shocks/losses.

• Retain our NEUTRAL stance on the sector on concerns of upticks in impairments of loans after the moratorium ends on Sept 2020. We continue to have BUYs on Maybank (FV: RM8.70/share), RHB Bank (FV: RM6.20/share) and Hong Leong Bank (FV: RM15.60/share). We have revised our FV for ABMB to RM2.20/share (previously: RM2.30/share) after imputing higher NIM compression for FY21) and upgraded CIMB to a HOLD with unchanged FV of RM3.40/share due to the recent retracement of share price.

Source: AmInvest Research - 1 Jul 2020