System Loans Growth Was Unchanged at 3.9% YoY While Deposits Gathered Pace to 5.0%. Also, Asset Quality Was Still Resilient But Leading Indicators Tapered. As for NIM, We Expect It to be Stable, Premised on No OPR Cut and 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; BUY Calls Include: Maybank, Public, RHB, BIMB & Affin.

Loans Growth Was Unchanged in May-21 at 3.9% YoY (Apr: 3.9%), Thanks Mainly to the Household Segment (HH, +6.1%); This Was Buoyed by Mortgage (+7.4%) and Auto Financing (+7.7%). That Said, Business (Biz) Lending Growth Remains Muted at +0.4%; Working Capital Loan (+2.0%) Helped to Cushion a Further Slowdown. Overall, It Was in Line With Our Full-year FY21 Loans Growth Expectation of +3.5-4.0%.

Tapering leading indicators. Loan applications slowed to 63.6% YoY (Apr: +92.1%) due to softer credit demand for HH (+3-fold vs Apr: +5-fold) and Biz (-5.6% vs Apr: - 10.3%) segments. Similarly, loans approval moderated to 80% (Apr: +96.4%) with HH waning (+3-fold vs Apr: +5-fold) but Biz gained some traction (+8.1% vs Apr: -8.6%).

Deposits growth picked up pace to 5.0% YoY (Apr: 4.6%), thanks to CASA (+17%) and foreign currency products (+10%). Overall, May-21’s loan-to-deposit ratio stayed fairly flattish MoM at 88% (near to Feb-18’s peak of 89%). In general, deposit taking competition is benign.

Asset quality was still resilient as gross impaired loans (GIL) ratio only nudged up 2bp MoM to 1.59% (HH +3bp, Biz +1bp). We expect GIL ratio to continue to climb 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 3bp MoM while the 3-month board fixed deposit rate stayed flattish. In turn, the spread dropped by 3bp. 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 -1.0SD 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 opinion. For largesized banks, we like Maybank (TP: RM9.40) for its strong dividend yield, and Public Bank (TP: RM4.50) for its defensive qualities, 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 & also, larger FVOCI reserve to buffer against potential yield curve volatility. For small-sized banks, BIMB (TP: RM5.20) and Affin (TP: RM2.15) are preferred over Alliance (TP: RM2.80); we like the former given its positive long-term structural growth drivers and better asset quality while the latter has value unlocking potential.

Source: Hong Leong Investment Bank Research - 1 Jul 2021