System loans & deposits growth held up well at 3.7% & 5.2% YoY respectively. That said, leading indicators turned weak again but asset quality was resilient. As for NIM, we expect it to be stable, premised on no OPR reduction and benign deposit rivalry in 2021. Although we are not entirely out of the woods yet, there are still reasons to be optimistic with the sector: (i) Covid-19 vaccination rollout, (ii) healing economy, and (iii) ample market liquidity. Retain OVERWEIGHT. We have BUY ratings on Maybank, RHB, and BIMB.

Loans growth held up well in Feb-21 at 3.7% YoY (Jan: +3.8%), thanks primarily to the household segment (HH, +5.1%); this came from mortgage (+7.0%), auto (+5.8%) and personal financing (+6.0%). That said, business (Biz) lending growth was still soft at +1.0%; working capital loan (+2.6%) helped to mitigate further slowdown. Overall, it was within our full-year FY21 loans growth expectation of +3.5-4.0%.

Leading indicators turned weak again. Loan applications declined 15.4% YoY (Jan: +9.7%) due to a drop in credit appetite for both HH (-5.8%) and Biz (-26.9%). As for loans approval, it shrank further to -18.4% from -3.5%; this was caused by tighter Biz (-37.2%) and HH lending (-1.9%).

Resilient deposits growth of 5.2% YoY (Jan: +5.0%) given robust CASA (+24.8%) and foreign currency deposits (+12.3%), which masked FD weakness (-5%). Overall, Feb-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 was steady as gross impaired loans (GIL) ratio ticked down 1bp MoM to 1.59%, thanks to the HH segment (-2bp) while Biz was unchanged. 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). Furthermore, the Government and BNM will be supportive in helping troubled borrowers, limiting a significant sag in GIL ratio.

Interest spread widened. Both the average lending and 3-month board fixed deposit rates expanded 5bp and 1bp MoM respectively. As a result, the spread broadened by 4bp MoM to 1.91%. We expect net interest margin (NIM) to be stable, premised on no OPR cut and benign deposit rivalry in 2021.

Maintain OVERWEIGHT. Although we are not entirely out of the woods yet, there are still reasons to be optimistic with the sector: (i) Covid-19 vaccination rollout, (ii) healing economy, and (iii) ample market liquidity, motivating ‘risk on’ appetite into stocks with recovery and deep value traits. For large-sized banks, we like Maybank (TP: RM9.20) over Public (TP: RM4.25) and CIMB (TP: RM4.50); Public’s valuation is rich, has high foreign shareholding level and low yield while CIMB is a riskier proposition given less solid asset quality. For mid-sized banks, RHB (TP: RM6.65) is preferred over AMMB (TP: RM2.95) as the former has a stronger CET1 ratio and also, larger FVOCI reserve to buffer against steeping yield curve. For small-sized banks, BIMB (TP: RM5.00) is favoured vs Affin (TP: RM1.85) and Alliance (TP: RM2.90), for its positive long-term structural growth drivers and better asset quality.

Source: Hong Leong Investment Bank Research - 1 Apr 2021