Both system loans and deposits growth remained flattish at 4.4% and 4.5% YoY respectively. Also, asset quality continued to improve; these came as a result of the loan moratorium. However, cautious lending pattern persisted while interest spread narrowed. Overall, it is too early to claim that pain points from Covid-19 crisis are behind us, especially when infection cases are on the rise again and the sector has to contend with risk of earnings recovery turning U- or W-shape (from current V-shape projection). However, these are balanced out by deflated valuations (P/B close to -2SD & lower than GFC’s level). Keep NEUTRAL and the only banking stock that we like now is RHB (TP: RM5.80), mainly for its strong CET 1 ratio, large untapped FVOCI reserves, and undemanding valuations.

Flattish loans growth. Aug-20’s system loans growth remained flattish at 4.4% YoY (Jul-20: +4.5%) as better household (HH) lending of 4.8% was offset by the business (Biz) segment, which tapered further to 3.3%; although it is still resilient and above our +3.0-3.5% growth expectations for the full year, we see a slowdown in the upcoming months as repayment activities gain momentum. In HH, the improvement came from mortgage (+7.5%) and personal financing (+6.0%). As for Biz, the deceleration was no thanks to slower working capital (+2.6%).

Cautious lending. Loan application declined 13.7% YoY (Jul-20: +5.9%) due to weak credit appetite from Biz (-39.1%) while HH held up well (+9.9%). Also, loan approvals fell 13.2% (Jul-20: -14.3%) given more prudent lending for both Biz (-25.7%) and HH (-3.4%).

Deposits growth was static at 4.5% (Jul-20: +4.5%) as fixed deposits taper further (- 2.1%) but was mitigated by more robust CASA growth (+20.2% vs Jul-20’s +18.4%). Overall, Aug-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 1.40%; this was led by the HH segment (-4bp), 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 shrunk. Both the average lending and 3-month board fixed deposit rates slipped 6bp and 1bp MoM respectively. As a result, the spread contracted 5bp MoM to 2.02%. We reckon the squeeze will persist and we expect weaker net interest margins (NIM) in 3Q20 given Jul-20’s OPR reduction but it poised to recover in 4Q20 and FY21 from downward deposit repricing; we do not foresee any more OPR cuts for the rest of FY20.

Maintain NEUTRAL. We believe it is too early to claim that pain points from Covid-19 crisis are behind us, especially when infection cases have been on the rise again and the sector has to contend with risk of earnings recovery turning U- or W-shape (from current V-shape projection). However, these are balanced out by deflated valuations. 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 Oct 2020