System loans growth gained traction to 3.8% YoY while deposits remained firm at 5.0%. That said, leading indicators were mixed again and asset quality con tinued to show weakness. As for NIM, we anticipate a squeeze in 1H21 (but will be short-lived) given a budding 25bp OPR cut. All in all, we are still positive on banks due to impending Covid-19 vaccination rollout, supportive government measures in helping troubled borrowers, and undemanding valuations. As for sentiment on banks being potentially weigh down by the fiasco surrounding AMMB, if any, we see it as a good buying opportunity. Retain OVERWEIGHT on the sector; we have BUY ratings on Maybank, RHB, and BIMB.

Loans growth gathered steam in Jan-21 to 3.8% YoY (Dec: +3.4%) thanks to both the household (HH) and business (Biz) segments, which expanded by 5.3% and 1.5% respectively. In HH, the growth was buoyed by mortgage (+7.1%), auto (+5.6%) and personal financing (+6.1%). While Biz, it was aided by working capital loans (+2.8%). Overall, it was within our full-year FY21 loans growth expectation of +3.5-4.0%.

Mixed leading indicators. Loan applications grew 9.7% YoY (Dec: +12.3%) due to better HH credit appetite (+30.6%) while the decline at Biz has widened to -15.7% (vs Dec: -4.5%). As for loans approval, it shrank further to -3.5% vs Dec: -0.1%; this was caused by tighter Biz (-17.5%) and HH lending (+8.8% vs Dec: +14.1%).

Resilient deposits growth of 5.0% YoY (Dec: +4.5%) given robust CASA (+24.1%) and foreign currency deposits (+8.2%), which masked FD weakness (-4.6%). Overall, Jan-21’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 4bp MoM to 1.60%, no thanks to both the HH (+4bp) and Biz segments (+4bp) as the automatic loan deferment ended in Sep-20. We expect GIL ratio to creep upwards but would not be overly concerned as banks have made heavy pre-emptive provisioning in FY20 and we reckon credit risk has been passably priced in by the market, looking at the elevated NCC assumption used for FY21 by both us and consensus (above the normalized run-rate but below FY20’s level). Also, the Government and BNM will be supportive in helping troubled borrowers, limiting a significant sag in GIL ratio.

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 1.87%. That said, we see net interest margin (NIM) being squeezed in 1H21 but will be short-lived) given a budding 25bp OPR cut as Covid-19 case count remains relatively high and could slow down and delay slightly the economic recovery.

Retain OVERWEIGHT. We are still positive on banks given the impending Covid-19 vaccination rollout. Also, sector valuation is undemanding (at -1.5SD 5-year average P/B) and there is ample market liquidity. As for sentiment on banks being potentially weigh down by the fiasco surrounding AMMB, if any at all, we see it as a good buying opportunity. Nonetheless, this should not happen considering the idiosyncratic nature of the event and funds are likely to rotate to other banking stocks, in order to capitalize on the recovery, reopening, and deep value investing themes. For large-sized banks, we like Maybank (TP: RM9.20) over Public (TP: RM4.25) and CIMB (TP: RM4.50). For mid-sized banks, RHB (TP: RM6.65) is favoured over AMMB (TP: RM2.95). As for small-sized banks, BIMB (TP: RM5.00) is our preferred pick vs Affin (TP: RM1.85) and Alliance (TP: RM2.90).

Source: Hong Leong Investment Bank Research - 1 Mar 2021