System loans growth remained firm at 4.3% YoY but deposits retreated to 4.4%. Also, asset quality displayed some marginal weakness and leading indicators were still mixed. However, we expect NIM to heal in 4Q20 and FY21 from downward deposit repricing. Although we are not entirely out of the woods yet, there are still reasons to be excited with the banking sector: (i) the worst appears to be behind us and economic recovery is underway, along with (ii) ample liquidity in the market, encouraging ‘risk on’ appetite into stocks with recovery and deep value attributes. Thus, the sector’s risk-reward is now skewed favourably to the upside. With 4 BUY calls (Maybank, RHB, AMMB & BIMB), we are upgrading the sector to OVERWEIGHT.

Steady loans growth. Oct-20’s system loans growth held firm at 4.3% (Sep: +4.4%) as household (HH) lending of 5.1% continues to anchor expansion while the business (Biz) segment, tapered further to 2.5%. In HH, the rise came from mortgage (+7.3%) and personal financing (+6.9%). While for biz, softer working capital (+2.2%) was the culprit. Yet again, overall expansion in lending remained resilient and was above our +3.0-3.5% full year FY20 growth estimates; as such, we revise it up to 3.5-4.0%.

Mixed leading indicators. Loan application declined 6.1% YoY (Sep: +16.6%) due to weak credit appetite from Biz (-26.1%) but HH continued to increase (+11.2%). As for loans approval, it improved marginally by 0.8% YoY (Sep: +4.8%) as lending to HH remained accommodative (+7.7%) but still cautious with Biz (-8.6%).

Deposits growth slowed to 4.4% YoY (Sep: +5.2%) as fixed deposits drop further by 3.9% while foreign currency tapered as well (+4.5%). Overall, Oct-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 showed some weakness as gross impaired loans (GIL) ratio ticked up 5bp MoM to 1.43%; this was no thanks to the HH segment (+7bp) as the automatic loan deferment ended in Sep-20. However, with banks providing targeted assistance, we expect the sector’s GIL ratio to remain at low levels throughout 1H21.

Interest spread shrunk. Both the average lending and 3-month board fixed deposit rates slipped 11bp and 1bp MoM respectively. As a result, the spread contracted 10bp MoM to 1.94%. We reckon the squeeze will be short-lived and we expect net interest margin (NIM) recovery in 4Q20 and FY21 from downward deposit repricing.

Upgrade to OVERWEIGHT. Although we are not entirely out of the woods yet, there are still reasons to be excited with the banking sector, since market is forward looking in anticipation of an economic recovery (there are several effective Covid-19 vaccines, making this a turning point of the pandemic). Moreover, there is ample liquidity in the market, spurring ‘risk on’ appetite into stocks with recovery and deep value attributes. Hence, we believe the sector’s risk-reward is now skewed favourably to the upside, especially when it is also trading at -1.5SD to its 5-year average P/B. For large-sized banks, we like Maybank (BUY, TP: RM9.00) over Public Bank (HOLD, TP: RM19.70) and CIMB (HOLD, TP: RM3.65). This is because Public Bank’s valuation is steep, has higher foreign shareholding and lower yield while CIMB is a riskier proposition given less resilient asset quality. For mid-sized banks, we favour RHB (BUY, TP: RM6.25) and AMMB (BUY, TP: RM3.70) for undemanding valuations. Also, we are fond of the former for its strong CET1 ratio and fairly large untapped FVOCI reserves. For smallsized banks, BIMB (BUY, TP: RM4.15) is preferred vs Affin (HOLD, TP: RM1.65) and Alliance (HOLD, TP: RM2.60), for its positive long-term structural growth drivers and better asset quality

Source: Hong Leong Investment Bank Research - 1 Dec 2020