The banking system loans started the year with Jan20’s growth rate of 3.5% yoy while staying relatively flat on a mom basis. As expected, loan disbursements edged down 13.3% mom due to a robust month in Dec19. In-line with weaker sentiment and also the seasonal period in January, we saw a dip in loan applications and approvals as well. Asset quality for the sector, as implied by a gross impaired loan ratio of 1.51% remains unchanged mom, though the outstanding impaired loans continued rising by 2.8% mom. Certain economic sectors, primarily the finance/business activities, construction, transportation and household, had contributed to the mom increase of 2.8% in Jan20’s system impaired loans. Given a more subdued economic outlook in 2020, our loan growth target remains unchanged at 3% while not discounting the possibility of a further increase in the system impaired loans as sentiment deteriorates. We maintain our NEUTRAL stance on the sector, with AMMB (AMM MK, RM3.70, BUY) and Aeon Credit (ACSM MK, RM12.98, BUY) as our top picks.

Jan20 loans up 3.5% yoy; flat mom The banking system saw loan growth of 3.5% yoy in Jan20, while staying flat on a mom basis. For 2020, our system loan growth forecast is at 3.0%. Key sectors driving our system loan growth includes household loans (primarily residential properties, credit cards), as well as manufacturing, construction and wholesale/retail sectors. According to Bank Negara Malaysia, subsequent to the chunky disbursements of some business loans in Dec19, there were lower business activities coupled with higher repayments yoy. Details of the Jan20 loan-growth trends are as follows:

i) Business loans saw Jan20 yoy growth of 2.5% yoy, while mom declined by 0.5% as disbursement activities moderated, down 18% mom (underpinned by manufacturing, construction, real-estate, finance/business activities).

ii) Household loans were up 4.5% yoy in January, driven by growth in residential mortgages and credit cards in particular. New loan approvals and loan applications saw pullback of 3.3 mom and 8.5% mom, respectively, driven by mortgages.

Banking System Liquidity Remains Healthy and Ample

The banking system’s liquidity continued to improve to comfortable levels, as implied by the higher system’s Liquidity Coverage Ratio (LCR, Fig 29) of 151%, while the loan-to-fund ratio rose further to 83.4% in Jan20. 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 to 4.60% Mom

The commercial banks’ average lending rate (ALR) continued to trend lower to 4.60% mom (from 4.7% in Dec19). The recent 25bps rate cut in Jan20 will drive the commercial banks’ ALR lower, while banks’ funding costs will eventually edge down lower in the next 6 months. Subsequent to the OPR cut in Jan20 and coupled with the impact of another potential cut (of 25bps) in Mar20, we expect the overall banking system NIM to edge down by around 10bps in 2020 to 2.02%. Outstanding impaired loans expanded by 2.8% mom The system GIL ratio was relatively unchanged at 1.51% Jan20, while the outstanding impaired loans rose by 2.8% mom, attributable to some stress in lending to certain sectors, such as finance/business activities, wholesale/retail, construction, transportation and the household sectors. Notably, the working capital, residential property, construction and commercial property segments make up the bulk of impaired loans by ‘loan purpose’.

GDP Growth Likely to Sustain, Driven by the Private Sector

Malaysia’s 4Q19 GDP has further declined to 3.6% vs. 4.4% in 3Q19, as driven by a slower external sector. In line with a more muted economic outlook, Affin’s economics team is currently forecasting a 2020E GDP growth of 4.0% to be supported by private investment and consumption spending. On a more positive note, the Nikkei Purchasing Manager Index, improved to 50 in December 2019 vs. 49.5 in November.

Malaysia’s unemployment rate saw a marginal uptick to 3.3 in Dec 2019 (from 3.2% in Nov 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 provide support to consumer spending and demand for both big and smallticket items.

Maintain Sector NEUTRAL Stance

We maintain our NEUTRAL sector view as we foresee a contraction in sector core of 1.8% yoy in 2020E and flat growth in 2021E. Based on our forecasts, the sector is currently trading at a 2020E P/BV multiple of 1.0x 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: further cuts in the OPR (further NIM compression), moderation in loan growth, new NPL formation (with respect to commercial property, residential property, agriculture, construction, oil & gas and retail SME loans) and higher overheads. Upside risk: a recovery in global growth.

Top Picks – AMMB, Aeon Credit and ELK-Desa

AMMB (AMM MK, RM3.70, BUY, TP: RM4.80 based on 2020E P/BV target of 0.8x), has shown decent improvement in its operating results while its peers have shown signs of moderation. The recent 25bps OPR cut is not expected to affect AMMB’s earnings significantly due to its less asset 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 SME, mortgage and business loans (offsetting the impact of corporate loan repayments); ii) improving NIM (1.9-2.0%); iii) low net credit cost (~12bps); and iv) sound loan book (GIL at 1.71%). We believe that higher dividends could be on the cards this year.

Aeon Credit (ACSM MK, RM12.98, BUY, TP: RM17.20 based on CY20E target PER of 13x). We expect receivable growth to remain robust at over 20% yoy as management shifts its market focus to the middle-income segment. With management relooking at its pricing strategy, we believe it would eventually boost interest income growth and lower its credit costs (which was elevated under the MFRS 9 adoption). 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, RM1.59, TP RM1.82 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 in the Klang Valley, coupled with strong support from car dealers. Ultimately, as management gears up its balance sheet (net gearing ratio 0.46x), the group would be able to maintain its receivable 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 its peer's strategy, such as the Aeon Credit Group (which has a gearing ratio of 3.92x).

Source: Affin Hwang Research - 2 Mar 2020