System loans growth continued to soften to 3.1% while deposits held steady at 4.0% YoY. Also, leading indicators were lacklustre & asset quality showed some weakness. As for NIM, we expect it to come under slight pressure premised on brewing deposit competition and limited scope for further CASA expansion. In our opinion, the sector’s risk-reward profile continues to skew favourably to the upside as we believe most negatives have been priced in by the market. Retain OVERWEIGHT; BUY calls include: Maybank, Public, RHB, BIMB & Affin.

Loans growth continued to soften in Jul-21 to 3.1% YoY (Jun: +3.4%) given weaker household segment (HH, +4.2% vs Jun: +5.2%) as slowdown was sighted across the board. That said, business (Biz) lending growth ticked up a little to 1.3% (Jun: +0.9%), thanks to better working capital loan (+3.1%). Overall, it was within our full-year FY21 loans growth expectation of +3.0-3.5%.

Lacklustre leading indicators. Loan application fell by -28.4% YoY (Jun: -1.0%) as credit demand for both HH (-37.7%) and Biz (-13.1%) were weak. Furthermore, loans approval slowed down as well (-16.2% vs Jun: -0.1%), no thanks to HH (-34.4%). That said, Biz provided some respite (+11.4%).

Deposit growth held steady at 4.0% YoY (Jun: +3.9%) despite CASA slowing down (+12.9% vs Jun: 14.0%) as foreign currency deposit (+22.1%) covered up the slack. Overall, Jul’s loan-to-deposit ratio remained fairly flattish MoM at 87% (near to Feb- 18’s peak of 89%). We understand there is brewing deposit competition in the market.

Asset quality showed some weakness as gross impaired loans (GIL) ratio nudged up 5bp MoM to 1.67%; this was dragged mainly by the HH segment (+7bp) while Biz stayed rather unchanged (+1bp). We expect GIL ratio to continue rising but would not be overly worried as banks have made heavy pre-emptive provisioning in FY20 & we reckon credit risk has been adequately priced in by the market, looking at the elevated NCC assumption used for FY21 by both us & consensus (above the normalized run rate but below FY20’s level). Also, the Government and BNM will remain supportive in helping troubled borrowers, limiting a significant deterioration in GIL ratio.

Interest spread narrowed. Average lending rate fell 4bp MoM while the 3-mth board fixed deposit rate was flattish. As a result, the spread narrowed by 4bp. We expect net interest margin (NIM) to be under slight pressure premised on brewing deposit rivalry and limited scope for further CASA expansion.

Retain OVERWEIGHT. The sector’s risk-reward profile continues to skew favourably to the upside as most negatives have been considered by the market. In our opinion, Covid-19 woes will likely fizzle out in 2022 while the state of the economy and banking sector will only get better in time. Furthermore, valuations are undemanding and there is ample liquidity in the market. For large-sized 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: RM5.10). For mid-sized banks, RHB (TP: RM6.85) is favoured more than AMMB (TP: RM3.00) 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: RM4.80) 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 Sept 2021