HLBank Research Highlights

Banking - Brighter Days Ahead

HLInvest
Publish date: Mon, 04 Jan 2021, 09:59 AM
HLInvest
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This blog publishes research reports from Hong Leong Investment Bank

System loans growth tapered to 3.8% YoY while deposits remained firm at 4.4%. That said, leading indicators were still mixed and asset quality displayed some weakness. However, we see NIM recovering in 4Q20 and FY21 from downward deposit repricing. This coupled with strong cost discipline and less intense pre - emptive provisioning efforts are expected to lift FY21 earnings by 21% (vs -27% in FY20). Other reasons to be optimistic on banks include: (i) Covid-19 vaccine discovery, (ii) healing economy, and (iii) ample market liquidity. Hence, maintain OVERWEIGHT. We have BUY ratings on Maybank, AMMB, RHB, and BIMB.

Loans growth tapered. Nov-20’s system loans growth decelerated to 3.8% YoY (Oct: 4.3%) as business (Biz) lending slowed further to 1.2%; on the other hand, household (HH) segment held firm at 5.0%. In Biz, the drag came from working capital (+0.8%). As for HH, mortgage (+7.2%) and personal financing (+6.4%) anchored its expansion. Overall, these were within our 2020 loans growth estimates of +3.5-4.0%. For 2021, we see loans rising at a similar pace given economic recovery but capped by stronger repayment activities.

Mixed leading indicators. Loan applications fell 5.1% YoY (Oct: -6.1%) again due to weak credit appetite from Biz (-30.1%) but HH continued to rise (+21.7%). Similarly, loans approval declined 4.2% (Oct: +0.8%), in tandem with tepid credit application for Biz (-20.6%) while lending to HH remained accommodative (+12.3%).

Deposits growth was static at 4.4% YoY (Oct: +4.4%) despite weak fixed deposits (- 3.4%) as it was mitigated by robust CASA (+23.0%). Overall, Nov-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 12bp MoM to 1.53%; this was no thanks to the HH segment (+18bp) 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 gained 3bp and 4bp MoM respectively. In turn, the spread narrowed 1bp MoM to 1.93%. We believe the squeeze will be short-lived and we expect net interest margin (NIM) recovery in 4Q20 and FY21 from downward deposit repricing.

Retain OVERWEIGHT. The sector’s risk-reward profile continues to skew favourably to the upside as most negatives have been considered by the market. In our opinion, Covid-19 woes will likely fizzle out in 2021 while the state of the economy and banking sector will only get better in time. Furthermore, valuations are undemanding and there is ample liquidity in the market. For large-sized banks, we like Maybank (TP: RM9.45) over Public (TP: RM21.70) and CIMB (TP: RM4.35); this is because Public’s valuation is steeper, has higher foreign shareholding and lower dividend yield while CIMB is a riskier proposition given less solid asset quality. For mid-sized banks, both RHB (TP: RM6.55) and AMMB (TP: RM4.05) are our preferred picks due to attractive valuations. As for small-sized banks, BIMB (TP: RM4.80) is favoured vs Affin (TP: RM1.90) and Alliance (TP: RM3.00), for its positive long-term structural growth drivers and better asset quality.

Source: Hong Leong Investment Bank Research - 4 Jan 2021

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