The banking system loans which saw a +3.9% yoy growth in Feb20, nonetheless had a muted +0.2% mom growth. Loan disbursement activities continued to decline for a second straight month in Feb20, in-line with weaker business outlook and moderation in consumer sentiment due to the COVID-19 outbreak. Despite seeing stronger loan applications (+14.3% mom), loan approvals rose by a marginal 1.0%. In terms of asset quality for the sector, we saw some deterioration as the outstanding gross impaired loans were up 4.0% ytd while the gross impaired loan ratio saw an uptick from 1.51% (Dec19) to 1.57% in Feb20 (led by sectors such as financing activities, household transportation and manufacturing sectors). Given a more subdued and cautious economic outlook in 2020, our loan growth target has been revised down to -3% yoy while not discounting the possibility of a further increase in the system impaired loans. We maintain our UNDERWEIGHT stance on the sector, with ELK-Desa (ELK MK, RM1.16, HOLD) as our top pick.

Feb20 Loans Up 3.9% Yoy; +0.2% Mom

The banking system saw loan growth of 3.9% yoy in Feb20 (as loan repayment activities moderated), although grew marginally by +0.2% on a mom basis. For 2020, our system loan growth forecast has been revised down to -3.0% (from flat loan growth). Key sectors driving our system loan growth includes household loans (primarily residential properties, credit cards), as well as manufacturing and wholesale/retail sectors. Subsequent to the chunky disbursements of some business loans in Dec19, it is not a surprise to see loan disbursements slowing down in Jan-Feb20, while the COVID-19 outbreak has further dampened sentiment. Details of the Feb20 loan growth trends are as follows:

i) Business loans saw a 3.2% yoy, while mom was up by 0.6% as disbursement activities moderated (down 7.5% mom underpinned by manufacturing, construction, financing activites).

ii) Household loans were up 4.4% yoy in February, driven by growth in residential mortgages and personal financing in particular. New loan approvals and loan applications was up 0.8% mom and 13.5% mom, respectively, driven by mortgages.

Banking System Liquidity Remains Healthy and Ample

The banking system liquidity continued to improve to comfortable levels, as implied by the higher system Liquidity Coverage Ratio (LCR, Fig 29) of 148%, while the loan-to-fund ratio was relatively unchanged at 83.3% in Feb20. Going forward, BNM has given banking institutions some leeway in their LCR (can operate below 100%) and the net-stable-funding-ratio (NSFR) requirement has been lowered to 80% (and to revert to 100% from 30 Sept 2021). This flexibility was given as banks are now offering an automatic moratorium period of 6 months for all individual accounts (except credit cards) and SME accounts (on loan and interest payments).

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), driven by the 25bps rate cut in Jan20. Coupled with the 2nd cut in Mar20 and another anticipated 25bps cut in the near term, we are forecasting 2020E NIM to be around 1.95% (vs.2.1% in 2019).

Outstanding Impaired Loans Expanded by 4% Ytd

The system GIL ratio continued to edge up to 1.57% in Feb20, while the outstanding impaired loans rose by 4.0% ytd, attributable to some stress in lending to certain sectors, such as financing activities, household transportation and manufacturing sectors. Notably, the working capital, residential property, construction and commercial property segments make up the bulk of impaired loans by ‘loan purpose’.

A Recessionary Outlook in 2020 Led by Decline in Consumption Spending

Malaysia’s 4Q19 GDP has further declined to 3.6% vs. 4.4% in 3Q19, driven by a slower external sector. In line with a more muted economic outlook, Affin’s economics team has revised down 2020E GDP growth to -3.5%, due to an expected slowdown in private investment and consumption spending in light of the on-going COVID-19 outbreak in the country. The Nikkei Purchasing Manager Index meanwhile, has declined further from 48.8% to 48.5% mom in Feb20, an indication of weakening business conditions ahead.

Maintain Sector UNDERWEIGHT

We maintain our sector UNDERWEIGHT call, noting that earnings growth remains unexciting while with the introduction of additional measures by BNM, this has put further pressure on banks’ liquidity and funding. In addition, a prolonged Covid-19 outbreak will cause non-performing loans to spike up. At this juncture, we foresee a contraction in sector core EPS growth of 20% yoy in 2020E, and a slightly modest growth rate of +1.5% yoy in 2021E. On stock picks, we remain selective and, we prefer ELK-Desa (ELK MK, RM1.16, HOLD, Price Target RM1.13) due to its attractive yield and resilient business in the auto-financing of mass-market used-cars.

Source: Affin Hwang Research - 1 Apr 2020