Both system loans & deposits growth gained traction (+4.5% YoY respectively), while asset quality improved; all these resulted from the loan moratorium. However, there were some cautious lending behaviour. Besides, the recent OPR cut and potentially another one (-25bp) in 2H20 will hurt NIM. Overall, it is too early to claim that pain points from Covid-19 crisis are behind us. The sector may have to contend with risk of a lag in NPL formation and advent of a second wave infection. However, these are balanced out by deflated valuations (P/B close to -2SD & lower than GFC’s level). Retain NEUTRAL and the only banking stock that we like now is RHB (TP: RM5.80), primarily for its strong CET 1 ratio, relatively large untapped FVOCI reserves, and undemanding valuations.

Loans growth gathered momentum. Jul’20’s system loans growth gained traction to 4.5% YoY (Jun-20: +4.1%) due to better household (HH) lending (+4.3%). However, the business (Biz) segment continued to lose steam (+3.9%). In HH, the improvement came from mortgage (+7.4%) and personal financing (+5.2%). While for Biz, working capital (+4.1%) was still the main contributor. Yet again, overall expansion in lending remained resilient and was above our +2.0-2.5% full year growth estimates; this was due to the effect of loan moratorium, which slowed repayment activities. As such, we revise up our 2020 system loans growth estimates to 3.0-3.5%.

Cautious lending. Loan application continued to rise 5.9% YoY (Jun-20: +8.0%) due to better credit demand from HH (+15.4%) but Biz remained weak (-6.8%). However, loan approvals were uninspiring as it fell 14.3% (Jun-20: -12.7%) given tighter lending for both HH (-7.8%) and Biz (-22.6%).

Quicker deposits growth of 4.5% (Jun-20: +4.4%) as CASA accelerated to 18.4% (Jun-20: +16.8%); however, fixed deposits was still tapering (-1.5%). Overall, Jul-20’s loan-to-deposit ratio (LDR) was flattish sequentially at 88% (near to the peak of 89%, back in Feb-18). In general, deposit taking competition is benign.

Asset quality improved as gross impaired loans (GIL) ratio ticked down 3bp MoM to 1.43%; this was led by the HH segment (-6bp), which we believe was due to the effect of loan deferment. Since the Government has agreed to extend the loan moratorium and banks will provide targeted assistance, we see the sector’s GIL ratio to remain at low levels for the rest of the year. However, it may hide actual damage and cause a lag in non-performing loan (NPL) formation if the situation does not improve rapidly or an advent of Covid-19 second wave paralyses the country again.

Interest spread widened. Both the average lending and 3-month board fixed deposit rates contracted 19bp and 23bp MoM respectively. As a result, the spread broadened 4bp MoM to 2.07%. However, this is likely to be short-lived and we see weaker net interest margins (NIM) outlook given the recent OPR reduction and potentially another one (-25bp) in 2H20. Furthermore, there is diminishing flexibility to optimize LDR.

Maintain NEUTRAL. We believe it is too early to claim that pain points from Covid-19 crisis are behind us. The sector may have to contend with risk of delayed deterioration in asset quality and advent of a second wave infection. However, these are balanced out by deflated valuations. For exposure, the only bank we like now is RHB (BUY, TP: RM5.80) given its appealing risk-reward profile, backed by undemanding valuations, strong 16.6% CET1 ratio (sector: 14.4%), and fairly large untapped FVOCI reserves. Separately, we have SELL rating on Public (TP: RM14.80) for rich valuations.

Source: Hong Leong Investment Bank Research - 1 Sept 2020