System loans growth remained flat at 4.4% YoY while deposits gained traction to 5.2% Also, asset quality continued to improve; these came as a result of the loan moratorium. However, leading indicators were mixed. Besides, we see NIM to be weak in 3Q20 given Jul-20’s OPR cut but it poised to recover in 4Q20 and FY21 from downward deposit repricing. That said, with Covid-19 infection cases rising again, banks now have to contend with risk of earnings recovery turning U- or W-shape (from current V-shape projection). However, this is balanced out by deflated valuations. Retain NEUTRAL and the only banking stock that we like presently is RHB (TP: RM5.80), mainly for its strong CET 1 ratio, large untapped FVOCI reserves, and undemanding valuations.

Loans growth unchanged. Sept-20’s system loans growth stays unchanged at 4.4% YoY (Aug: +4.4%) as improved household (HH) lending of 5.2% was diminished by the business (Biz) segment, which slowed down further to 2.7%; despite continuing to be resilient and above our +3.0-3.5% growth expectations for the full year, we expect deceleration in the upcoming months as repayment activities pick up pace. In HH, the rise was primarily thanks to mortgage (+7.6%) and personal financing (+6.9%). As for biz, softness came from weaker working capital (+2.5%).

Mixed leading indicators. Loan application expanded 15.7% YoY (Aug: -13.7%) due to better credit demand from HH (+44.7%) but Biz remained soft (-16.4%). Also, loan approvals improved 3.7% (Aug: -13.2%) on the back of more accommodative lending for HH (+24.7%) while Biz was still relatively tight (-17.7%).

Deposits growth gained momentum to 5.2% YoY (Aug: 4.5%) due to better foreign currency deposits (+15.5%) and CASA growth (+20.5%). Overall, Sep-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 2bp MoM to 1.38%; this was led by the HH segment (-3bp), 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 expect the sector’s GIL ratio to remain at low levels throughout 1H21. However, it may mask actual damage and cause a lag in non-performing loan (NPL) formation if the Covid-19 crisis does not improve rapidly or instead, deteriorates further.

Interest spread widened. Average lending rate was unchanged while 3-month board fixed deposit rate slipped 2bp. As a result, the spread expanded 2bp MoM to 2.04%. Overall, we expect weaker net interest margins (NIM) in 3Q20 given Jul-20’s OPR cut 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.

Retain NEUTRAL. With Covid-19 infection cases on the rise again, banks now have to contend with risk of earnings recovery turning U- or W-shape (from current V-shape projection). However, this is balanced out by deflated valuations (P/B close to -2SD & lower than GFC’s level). Presently, the only bank we like is RHB (BUY, TP: RM5.80) for its appealing risk-reward profile, backed by: (i) undemanding valuations, (ii) strong 16.6% CET1 ratio (sector: 14.6%), and (iii) fairly large untapped FVOCI reserves

Source: Hong Leong Investment Bank Research - 2 Nov 2020