Investment Highlights

• Industry loan growth rose to 4.5% YoY in July 2020 as household loans continued to pick up pace with improvement in loans for purchase of residential property, passenger cars and personal financing. Growth in household loans gained further traction to 4.3% YoY while non-household loan growth eased slightly to 4.7% YoY. YTD loans growth improved marginally to 3.3% annualised. July 2020 saw higher repayments compared to disbursements for non-household loans. We now expect the industry loan growth to be 3.0–4.0% (previously: 2.0%) for 2020 with potentially further disbursements for special relief facilities for SMEs and a slightly better household loan growth in 2H20 than 1H20 after the easing of MCO restrictions.

• The level of loan applications continued rise MoM in July 2020 but loan approvals slowed down. In July 2020, growth in industry loan applications remained positive at 5.9% YoY vs. 8.0% YoY in June 2020. Both the levels of household and nonhousehold applications rose in July 2020. Meanwhile, the industry loan approvals slowed down with a wider contraction of 14.3% YoY vs. -12.7% YoY in June 2020, attributed to slower non-household loan approvals.

• Weighted average lending rate and base rate declined further due to the 25bps OPR cut in July 2020. July 2020 saw the sector's weighted average lending rate and base rate slipping by 18bps and 25bps to 4.07% and 2.43% respectively with the announcement of another 25bps cut in OPR to 1.75%. Interest spread (difference between weighted average lending rate and average FD rate) stood at 2.41%. We continue to expect another OPR cut of 25bps as early as the next MPC meeting in Sep 2020 to reduce the benchmark interest rate to 1.50%.

• Stable deposit growth while industry CASA continued to surge. Industry deposit growth inched up to 4.5% YoY while CASA accelerated to a higher growth of 18.6% YoY, lifting the CASA ratio to 29.2%. The LD ratio for the sector remained stable at 87.9%. Sector LCR increased to 152.0% vs. 149.0% in June 2020.

• Impaired loans continued to decline but provisions climbed MoM. The industry’s outstanding impaired loans in July 2020 was lower by 1.9% MoM or RM509mil largely driven by lower impairments of household loans. The industry’s total GIL further improved to 1.4% while NIL ratio held up at 0.9%. The sector’s loan loss cover increased to 95.5%. We believe that this has been contributed by the lower impaired loans with the bulk of SME and consumer loans still under moratorium while banks continued to build up their provision buffers for the impact of Covid-19. Excess capital buffer remained healthy at RM118.1bil to withstand any shocks/losses.

• Retain our NEUTRAL stance on the sector on concerns of upticks in impairments of loans after the blanket automatic moratorium ends. Our top picks are Hong Leong Bank (FV: RM16.50/share), RHB Bank (FV: RM5.70/share) and Maybank (FV: RM8.40/share). We have upgraded our call on Hong Leong Bank to BUY from HOLD premised on expectation of better recovery in interest margins from its ability to reprice down its deposits faster with a shorter tenure for deposits, lower credit cost and exposures to vulnerable segments of Covid-19 pandemic relative to peers.

Source: AmInvest Research - 2 Sept 2020