Both system loans and deposits growth picked up momentum to 2.9% and 4.7% respectively. Similarly, leading indicators and asset quality have improved. As for NIM, we see it coming under slight pressure premised on brewing deposit rivalry and limited scope for further CASA expansion. Despite largely positive developments, we expect knee-jerk reaction to share prices, no thanks to ‘Cukai Makmur’. We advocate to accumulate on weakness, especially if the pull back is close to 10%. Keep OVERWEIGHT; BUY ratings include: Maybank, Public, RHB, and Affin.

Sep-21’s loans growth picked up momentum to 2.9% YoY (Aug: +2.5%), led by the business (Biz) segment, which strengthened to 2.3% (Aug: +0.8%); this was primarily buoyed by working capital financing (+3.8%). However, household (HH) lending stays tepid at 3.2% (Aug: +3.4%) due to weak auto (-0.6%) and personal loans (-0.5%). For now, overall system loans growth continues to trend beneath our +3.0-3.5% full-year FY21 estimates but we expect this to further gain traction at the later part of the year, given economic reopening.

Leading indicators improved. Loan applications expanded 12.5% MoM on the back of stronger HH credit appetite (+31.8%) but Biz remained sluggish (-9.6%). Similarly, loans approval saw an improvement of 13.7%; this was fuelled by accommodative HH (+30.9%) but again Biz was lacklustre (-0.1%).

Deposits growth also gathered steam to 4.7% YoY (Aug: +3.7%) as FD contraction has narrowed (-1.7% vs Aug: -2.8%) while other deposits grown faster (+5.4% vs Aug: +1.5%). Overall, Sep-21’s loan-to-deposit ratio remained flattish MoM at 87% (near to Feb-18’s peak of 89%). We understand there is brewing deposit rivalry in the market.

Asset quality seems to have mended as gross impaired loans (GIL) ratio decreased 10bp MoM to 1.57%; this was aided by Biz, which declined 26bp while HH nudged up 1bp. Regardless, we expect GIL ratio to rise but would not be overly worried as banks have already made heavy pre-emptive provisioning in FY20 and we reckon credit risk has been adequately priced in by the market, looking at the elevated NCC assumption utilized for FY21 by both us and consensus (above the normalized run-rate but below FY20’s level). Moreover, the Government and BNM will remain supportive in helping troubled borrowers, limiting a significant deterioration in GIL ratio.

Interest spread widened. Average lending rate expanded 5bp MoM while the 3-mth board fixed deposit rate ticked up 1bp. As consequence, the spread widened by 4bp. Nevertheless, we expect net interest margin (NIM) to be under slight pressure given brewing deposit rivalry and limited scope for further CASA expansion.

Maintain OVERWEIGHT. We expect knee-jerk reaction to share prices due to ‘Cukai Makmur’; we estimate sector earnings impact is -10%. However, it is a one-off event and more importantly, Covid-19 woes are seen to fizzle out in 2022 while the state of the economy and banking sector will only get better in time. Moreover, valuations are still undemanding and there is ample liquidity in the market. As such, we advocate to accumulate on weakness, especially if share prices pull back by c.10%, similar to our ‘Cukai Makmur’ profit impact calculation. BUY ratings include: Maybank (TP: RM9.40), Public Bank (TP: RM4.50), RHB (TP: RM6.85), and Affin (TP: RM2.15).

Source: Hong Leong Investment Bank Research - 1 Nov 2021