Banking - A Mixed Bag

HLInvest

Publish date: Thu, 02 Jan 2020, 10:48 AM

The slowdown in system loans growth was arrested in Nov-19 at 3.7% YoY but deposits growth tapered to 2.6%. However, leading indicators were better, asset quality improved, and interest spread widened. Although these were positives, we prefer to wait and observe trends for the next 1-2 months to confirm a bona fide improvement. For now, the growth outlook for banks remained tepid but we draw comfort from the sector’s cheap valuations as it trading at -2SD to its 5- year mean P/B. We maintain NEUTRAL and we advocate selective stock picking. Our preferred pick is Maybank (TP: RM9.05). Other BUYs are RHB (TP: RM6.20), BIMB (TP: RM4.80) and Alliance (TP: RM3.15).

Loans growth unchanged. Nov-19's system loans growth was held at 3.7% YOY (Oct-19: +3.7%) as both business (Biz) and household (HH) segments retained thier expansion pace of 2.4% and 4.7% YOY respectively. That said, in Biz, working capital (+1.3%) remained lethargic. While for HH, the fall in auto financing (-1.2%) and slower personal loans (+2.8%) continued to drag. Overall, these were within our 2019 loans growth estimates of +3.5-4.0%. For 2020, loans are expected to expand at similar rate given limited positive catalysts to spur stronger borrowing demand.

Better leading indicators but may be short-lived. Loan application bounced 26.4% (vs Oct-19: 3.2%), thanks mainly to better credit demand from Biz (+55.0%); this could be due to a delayed effect as it was sluggish throughout most of 2019. Hence, more positive observation is needed to confirm a bona fide improvement. Regardless, loan approvals follow suit (but at a much smaller quantum) by rising 2.8% (vs Oct: -12.8%) on the back of accommodative lending for both Biz (+2.4%) and HH (+3.3%).

Deposits growth tapered to 2.6% (vs Oct-19: +3.5%) given the tepid build-up in fixed and other non-mainstream deposits; we believe banks are managing these lower to prevent overexposure ahead of another potential OPR cut coupled with the slower loans growth climate. In Nov-19, loan-to-deposit ratio (LDR) was at 89% (similar to the peak of 89%, back in Feb-18). In general, deposit taking competition has eased and we believe the seasonal year-end price war may not be as intense in the past due to banks wanting to optimize down their cost of funds.

Asset quality improved as gross impaired loans ratio (GIL) ticked down 2bp MoM to 1.60%; this led by lower Biz’s GIL (-5bp MoM) given recovery at the manufacturing segment. However, HH’s GIL inched higher by 1bp MoM on the back of deterioration for personal financing. All in all, the sector’s GIL is still at a low level and broadly, we find that borrowers have the financial buffers to withstand severe shocks (see our 28 Mar-19 report, titled ‘On a steady ship’).

Interest spread widened. The average lending rate declined 3bp MoM while the 3- month board fixed deposit rate fell 5bp. In turn, the spread broadened 2bp to 1.87%. However, we reckon a squeeze will return on lower average lending yield, seeing the lacklustre loans growth climate should encourage banks to engage in price-based competition to chip share away from one another. Hence, we believe maintaining net interest margins (NIM) would remain as an uphill challenge.

Retain NEUTRAL. Although the growth outlook for banks is modest, we draw comfort from the sector’s inexpensive valuations as it trading near -2SD to its 5-year average P/B. Those that favour exposure to this sector have to be selective. We like banks that give above average dividend yields (Maybank; TP: RM9.05), still eking out healthy growth (RHB; TP: RM6.20 & BIMB; TP: RM4.80), and saw its valuations got bashed down to below -2SD and trough level (Alliance; TP: RM3.15).

Source: Hong Leong Investment Bank Research - 2 Jan 2020