System loans and deposits growth picked up momentum to 3.9% and 5.9% YoY respectively. Also, leading indicators improved and 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, BIMB, and Affin.

Loans growth picked up pace in Mar-21 at 3.9% YoY (Feb: 3.7%), thanks mainly to the household segment (HH, +5.7%); this came from mortgage (+7.1%), auto (+6.6%) and personal financing (+5.7%). That said, business (Biz) lending growth was still soft at +1.1%; working capital loan (+2.7%) helped to mitigate further slowdown. Overall, it was within our full-year FY21 loans growth expectation of +3.5-4.0%.

Leading indicators improved. Loan applications grew 43.9% YoY (Feb: -15.4%) due to stronger credit appetite for both HH (+82.9%) and Biz segments (+4.9%). Similarly, loans approval saw an improvement, with an increase of 34.0% from -18.4%; this was backed by accommodative HH (+55.7%) and Biz lending (+12.0%).

Resilient deposits growth of 5.9% YoY (Feb: +5.2%) given robust CASA (+21.4%) and foreign currency deposits (+15.7%), which masked FD weakness (-3%). Overall, Mar-21’s loan-to-deposit ratio (LDR) was flattish sequentially at 87% (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 1.58%, thanks to the Biz segment (-3bp) while HH was up 1bp. 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 remain supportive in helping troubled borrowers, limiting a significant deterioration in GIL ratio.

Flattish interest spread. Both the average lending and 3-month board fixed deposit rates fell 2bp MoM respectively. As a result, the spread was unchanged at 1.91%. We expect net interest margin (NIM) to stay 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. Hence, we believe it is only a matter of time when the market starts to look forward again on business environment retuning to normalcy. For large-sized banks, we like Maybank (TP: RM9.20) over Public Bank (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 resilient asset quality. For mid sized banks, RHB (TP: RM6.65) is preferred over AMMB (TP: RM2.90) as the former has a higher CET1 ratio and also, larger FVOCI reserve to buffer against volatile yield curve. For small-sized banks, BIMB (TP: RM5.00) & Affin (TP: RM2.25) are favoured vs Alliance (TP: RM2.90); we like the former for its positive long-term structural growth drivers and better asset quality while the latter has value unlocking potentials.

Source: Hong Leong Investment Bank Research - 3 May 2021