System loans growth held steady at 3.9% YoY but deposits lost some steam at 4.6% YoY. That said, leading indicators remained robust and asset quality was resilient. As for NIM, we expect it to be stable, premised on no OPR reduction & benign deposit competition in 2021. Despite the nationwide lockdown, we stay optimistic on the sector given: (i) Covid-19 vaccination rollout, (ii) undemanding valuations, and (iii) ample market liquidity. Retain OVERWEIGHT. We have BUY ratings on Public, Maybank, RHB, BIMB, and Affin.

Loans growth held steady in Apr-21 at 3.9% YoY (Mar: 3.9%), thanks mainly to the household segment (HH, +6.2%); this was largely backed by mortgage (+7.4%), auto (+7.3%) and personal financing (+5.5%). That said, business (Biz) lending growth was still weak at +0.4%; working capital loan (+1.9%) helped to mitigate further slowdown. Overall, it was within our full-year FY21 loans growth expectation of +3.5-4.0%.

Leading indicators remained robust. Loan applications expanded 92.1% YoY (Mar: +43.9%) due to strong credit appetite for HH (+5-fold) but was capped slightly by the Biz segment (-10.3%). Similarly, loans approval saw a jump of 96.4% vs Mar: 34.0%; this was supported by accommodative HH lending (+5-fold) but Biz again fell 8.6%.

Deposits growth lost momentum to 4.6% YoY (Mar: +5.9%) given softness across all categories. Overall, Apr-21’s loan-to-deposit ratio (LDR) remains relatively flattish MoM at 88% (near to Feb-18’s peak of 89%). In general, deposit taking competition is benign.

Asset quality was resilient as gross impaired loans (GIL) ratio ticked down 1bp MoM to 1.57%, thanks to the HH segment (-3bp) while Biz 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.

Narrower interest spread. Average lending rate shrank 2bp MoM while the 3-month board fixed deposit rate stayed flattish. In turn, the spread dropped by 2bp. We expect net interest margin (NIM) to remain stable, premised on no OPR reduction and benign deposit rivalry in 2021.

Retain OVERWEIGHT. Even with the nationwide lockdown, we remain optimistic on the sector considering: (i) Covid-19 vaccination rollout, (ii) undemanding valuations (at -1.5SD 5-year mean P/B), and (iii) ample market liquidity (which we believe will soon again motivate ‘risk on’ appetite into stocks with recovery, reopening, and deep value traits). Hence, any selldown is an opportunity to accumulate, in our view. For large sized banks, we like Public Bank (TP: RM4.50) for its defensive qualities in uncertain times, and Maybank (TP: RM9.40) for its superior yield, over CIMB (TP: RM4.60). For mid-sized banks, RHB (TP: RM6.85) is favoured more than AMMB (TP: RM2.85) 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: RM5.20) & Affin (TP: RM2.15) are preferred over Alliance (TP: RM2.80); 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 - 1 Jun 2021