Both system loans and deposits growth remained fairly unchanged at 4.0% and 2.8% YoY respectively. Also, asset quality held steady. However, interest spread shrunk and leading indicators were weak. We see Covid-19 related headwinds being balanced out by the sector’s inexpensive valuations (P/B is now below - 2SD and GFC’s level). Maintain NEUTRAL and we like banks with strong capital ratios and were acutely based down. Thus, our BUY calls are RHB (TP: RM5.30) and Alliance (TP: RM2.35).

Unchanged loans growth. Apr-20’s system loans growth remained flat at 4.0% YoY (Mar-20: +4.0%) as better business (Biz) lending of 4.7% was offset by the household (HH) segment, which tapered further to 3.3%; although still resilient and above our +2.0-2.5% growth expectations for the full year, we see a slowdown in the upcoming months given confluence of events from Covid-19 crisis and imminent recession. In Biz, the pick-up came from working capital as it grew quicker at 4.9%. As for HH, the deceleration was due to the drop in credit card (-9.0%) and auto loans (-1.3%).

Frail leading indicators. Loan application decreased 41.4% (Mar-20: -9.8%) due to weak credit demand from both HH (-74.2%) and Biz (-6.7%). Similarly, loan approvals declined 48.4% (Mar-20: -22.5%) on the back of tighter lending for both HH (-77.9%) and Biz (-11.5%).

Deposits growth fairly unchanged at 2.8% (Mar-20: +2.7%) as fixed deposits taper further (-1.5%) but was cushioned by a more robust CASA growth (+12.6% vs Mar- 20’s +10.3%); banks managed fixed deposits lower to prevent overexposure ahead of the recent OPR cut. In Apr-20, loan-to-deposit ratio (LDR) remained at 89% (similar to the peak of 89%, back in Feb-18). In general, deposit taking rivalry has eased as banks are trying to optimize down their cost of funds.

Asset quality held steady as gross impaired loans (GIL) ratio ticked down 1bp MoM to 1.58%; this was thanks to HH (-4bp MoM), where the mortgage, auto, and personal financing segments improved. As for Biz, the waning working capital and construction segments caused the GIL ratio here to climb 4bp MoM. That said, we see the sector’s GIL ratio to remain at low levels till end Sep-20; borrowers were granted 6-mth loans deferment while the restructuring & rescheduling (R&R) of loans affected by Covid-19 will not be tagged as impaired; however, we expect GIL ratio to rise faster after the moratorium period.

Interest spread shrunk. Both the average lending and 3-month board fixed deposit rates slipped 14bp and 2bp MoM respectively. As a result, the spread contracted 12bp MoM to 1.90%. We reckon the squeeze will persist and we see weaker net interest margins (NIM) outlook given the recent OPR reduction and potentially another 25bps cut in 2H20. Furthermore, there is diminishing flexibility to optimize LDR.

Retain NEUTRAL. Near-term Covid-19 related headwinds are being balanced out by the sector’s inexpensive valuations. We like banking stocks that have strong capital ratios and were acutely based down (especially those with P/B below 1.00x, GFC’s trough, and -2SD). Hence, our BUY ratings are RHB (TP: RM5.30) and Alliance (TP: RM2.35).

Source: Hong Leong Investment Bank Research - 1 Jun 2020