The banking system loans grew by +3.9% yoy in May20 but continued to see subdued growth of +0.2% mom (Apr20: +0.1% mom). YTD, household loans grew by 0.3% while business loans saw a slightly stronger growth rate of 2.0%. Consumer loan applications for bigticket items (auto and housing) saw a pick-up in loan applications in May, while on the other hand, business loan applications, approvals and disbursements slowed down on a mom basis, subsequent to the stronger months in March-April (which was also driven by relief funds offered to SMEs). The COVID-19 pandemic and implementation of the movement-control-order (MCO) since 18 Mar, had caused unprecedented challenges to business activities and shifted the supply-demand dynamics. For 2020, we are projecting a 1% yoy decline in system loans, due to stronger credit demand from the business segment. Meanwhile, we do not discount the possibility of deterioration in asset quality in the domestic banking system, due to potential business closures and rising unemployment. Maintain UNDERWEIGHT on the sector, with Aeon Credit as our preferred pick.

COVID-19 Pandemic Drives Shift in Demand-supply Chain

Banking system loans were affected by the shift in demand for more credit by manufacturing, transportation/storage, energy/utility and wholesale/retail, sectors which needed additional loans to sustain under challenging conditions or to cope with an unexpected surge in demand (such as e-commerce business, warehousing, delivery services, food production, packaging materials) during the COVID-19 pandemic. On the other hand, we saw weaker loan growth coming from the households as well as the construction and real-estate sectors (which were affected by the stop-work order during MCO and CMCO). For 2020, we are projecting a 1% yoy decline in loan growth as we foresee due to potential write-offs of chunky loan exposures to sectors such as O&G, construction and realestate while notwithstanding stronger credit demand by certain business sectors. Details of May20 loan growth trends below:

i) Business loans saw a 4.5% yoy growth, while mom was rose by 0.1%. Disbursement activities continued to decline by 4.8% mom after a strong month in March-April. Loan approvals declined +16.5% mom.

ii) Household loans were up 3.2% yoy, mainly driven by growth in residential mortgages and personal financing in particular. New loan approvals and loan applications however picked up strongly by 52.8% mom and 64.% mom, largely for auto loans and mortgages

Source: Affin Hwang Research - 1 Jul 2020