Despite a loan growth of +0.6% mom in August 2019 (+3.9% yoy), the banking system’s year-to-date (YTD) loan growth was a sluggish 1.9%. Total amount of repayments continued to exceed total disbursements from Jan-Aug 2019, as business and consumer sentiment have remained cautious. Nonetheless, the RM101.4bn worth of loans disbursed in August was above RM93bn, i.e. the average size of monthly disbursements from 2014-18. As at August 2019, economic sectors which continue to see positive loan growth yoy are manufacturing, retail/wholesale, construction and households. In terms of asset quality, the 10.6% YTD rise in impaired loans, in our view, is a sign of stress in certain sectors of lending. This however, is compensated by an impaired loan cover of 90.3%. We maintain NEUTRAL on the sector, with RHB Bank (RHBBANK MK, RM5.64, BUY) and Aeon Credit (ACSM MK, RM14.58, BUY) as our top picks.

August 2019 Loan Growth at 3.9% Yoy

The banking system saw loan growth of 3.9% yoy in August 2019 (July: 3.9% yoy) while mom growth rose 0.6%. The ytd loan growth of 1.9% translates into an annualized loan growth of 2.9%. We expect a pick-up in 4Q19 driven primarily by drawdown of construction-related project loans as well as residential property loans (boosted by Home Ownership Campaigns). For 2019E, we have a loan growth target of 3.8% yoy, which we lowered from 5.0% recently. We believe that overall downside risks are cushioned by the broad-based economy, resilient domestic consumption spending and a low unemployment rate of 3.3% (June19). Details of the August loan-growth trends are as follows:

i) Business loans grew at a subdued pace of 2.5% yoy in August (from 2.5% yoy in July 2019), partially affected by loan repayment activity in the finance/insurance sector, wholesale/retail trade and manufacturing sectors. Real-estate, construction, wholesale/retail, business services and manufacturing are the key business sectors (accounting for 32.4% of system loans) driving loans on a yoy basis. According to MIER, the business conditions index remained in a contractionary mode in 2Q19, sliding to 94.2 points (from 95.3 pts in 4Q18; 94.2pts 1Q19).

ii) Household loan growth was up 4.6% yoy in August (July: 4.7% yoy) driven by growth in residential mortgages and personal financing. New loan applications, approvals and disbursements were lower on a mom basis, in particular for mortgages and auto-loans.

Banking System Liquidity Remains Healthy and Ample

The banking system’s liquidity continued to improve to comfortable levels, as implied by the system’s Liquidity Coverage Ratio (LCR, Fig 29) of 155% (July 2019; no data available for August 2019 yet), while the loan-to-fund ratio remains ample at 82.3% (July). To recap, banks have been diversifying their funding sources to better manage their currency and maturity mismatches, though deposits still remain the main source.

Commercial Banks Average ALR Edged Down Further, Post-OPR Cut

The commercial banks’ average lending rate (ALR) remains unchanged mom at 4.82% in August 2019, following the 25bps OPR cut in May. We expect banks’ funding costs to ease following the OPR cut, as most banks have an average fixed deposit maturity of between 6-9 months. We expect the overall banking system NIM to edge down by 9bps in 2019 to 2.20% (stemming from weak asset yields and overall higher funding cost).

Rising NPLs - in Business Working Capital and Commercial Property

Overall, the level of non-performing loans for the banks saw a further uptick of 0.01ppt, as implied by the GIL ratio of 1.61% in August 2019 vis-a-vis 1.6% in July 2019. The increase in NPLs of 10.6% on a year-to-date basis was driven primarily by the business working capital, residential and commercial property segments. Other economic sectors accounting for the bulk in system impaired loans include business services, household, wholesale/retail/ restaurant, construction, manufacturing and transportation.

GDP Growth Likely to Sustain, Driven by the Private Sector

We note that amidst moderating global growth, oil prices are holding up, which should be positive for Malaysia’s GDP. Affin’s economics team expects the economy to be supported by the private sector from capacity expansion, consumption spending and potentially a gradual recovery in commodity output.

Recent economic indicators have been better-than-expected. Malaysia’s 2Q19 GDP rose stronger to 4.9% vs. 4.5% in 1Q19 and 4.5% in 2Q18, primarily led by robust consumption spending. To recap, Affin’s economics team currently forecasts a 2019E GDP growth of 4.7%. Nonetheless, the Nikkei Purchasing Manager Index, indicated a slight dip from 47.6 in July 2019 to 47.4 in Aug 2019.

As the unemployment rate remained unchanged at 3.3% in July 2019 the labour-force participation rate also remained at its highest level of 68.5% in the past two years and the workforce is still growing in tandem with population growth. A robust labour market should be supportive of increased consumer spending and demand for both big- and small-ticket items.

Maintain Sector NEUTRAL Stance

We maintain our NEUTRAL sector view as we foresee a contraction in sector core EPS growth of -0.9% yoy in 2019E, and a slightly modest growth rate of +1.2% yoy in 2020E and +1.6% in 2021E. Based on our forecasts, the sector is currently trading at a 2019E P/BV multiple of 1.14x and 2020E’s at 1.07x, vs. the past-10-year average of 1.53x and past 5-year average of 1.35x. It traded at -1SD or 1.2x during the last crisis in the period of October 2008-March 2009. Key downside risks to our sector call: a 25bps cut in the OPR (further NIM compression), moderation in loan growth, new NPL formation (with respect to commercial property, residential property and construction loans) and higher overheads. Upside risks: a recovery in global growth.

Top Picks – RHB Bank, AMMB, Aeon Credit and ELK-Desa

RHB Bank (RHBBANK MK, RM5.64, BUY, TP: RM6.60 based on 2020E P/BV target of 1.0x), is on track to achieve better ROEs in 2019-21E, on the back of its FIT22 initiatives to focus on the affluent SMEs, mid and large cap companies. RHB’s NIM outlook is likely to improve in 2H19, on the back of effects of repricing down of fixed deposit rates and expiry of some senior debt securities/hybrid capital (of which, would not be renewed). Dividend payout is expected to be increased, based on a higher target ratio of 40%.

AMMB (AMM MK, RM4.14, BUY, TP: RM5.30 based on 2020E P/BV target of 0.85x), has shown decent improvement in its operating results while its peers are showing signs of moderation. Despite the recent interest rate cut, AMMB was least affected due to a more liability-sensitive balance sheet. Earnings outlook for AMMB is expected to be relatively steady, on the back of: i) its more robust targeted segment loan growth in SMEs, mortgages and business loans (offsetting the impact of corporate loan repayment); ii) improving NIM (1.85-1.9%); iii) low net credit cost (~12bps); and iv) sound loanbook (GIL at 1.66%). We believe that higher dividends could be on the cards this year.

Aeon Credit (ACSM MK, RM14.58, BUY, TP: RM17.20 based on CY20E target PER of 13x). We have recently revised down Aeon Credit’s earnings forecasts due to expectation of higher net credit cost at circa 4% over CY20E-22E. Nonetheless, receivables growth is expected to remain robust at over 20% yoy as management expands its market focus to the middleincome segment. As management relooks into its pricing strategy, we believe that this would eventually help to boost interest income growth and lower its credit cost. Aeon Credit remains an attractive alternative (to banks) financial play, and its projected ROE of c.19-20% over FY20-22E is one the highest among the financial stocks in our universe.

ELK-Desa (ELK MK, RM1.64, TP RM1.98 based on 13x CY20E EPS. We remain upbeat on ELK-Desa’s prospects, being a prudent mass-market used-car financing player in the Klang Valley. We see room for growth even in the Klang Valley alone, coupled with strong support from car dealers. Ultimately, as management gears-up its balance sheet (gearing ratio 0.31x), the group would be able to maintain its receivables growth of 16-20% p.a. without the need to raise equity capital. We see this as a key re-rating factor for the group, in-line with peer's strategy, such as the Aeon Credit Group (which has a gearing ratio of 3.92x).

Source: Affin Hwang Research - 1 Oct 2019