• Banking system loans grew by 4.4% yoy in Sept, while on a ytd-basis, loans were up 3.0% (household and business loans up 3.7% and 1.9% ytd).
• On a more positive note, loan disbursement, applications and approvals recovered in September, after seeing a weaker month in August.
• We reiterate our NEUTRAL stance on the banking sector, as we believe that the sector is not completely out of the woods yet (with potentially downside risks in asset quality in 2021), though banks could have already seen the worst quarterly earnings in 2Q20. Key upside/downside risks are a shorter/longer unemployment trend and less/more business closures.

Domestic Credit Demand Grew 4.4% Yoy in September

Ytd, system loans saw a shift in demand for more credit by the healthcare, wholesale/retail and manufacturing sectors, which needed additional loans to sustain challenging conditions or to cope with an unexpected surge in demand (such as ecommerce business, warehousing, delivery services, food production, packaging materials, medical equipment/devices) during the COVID-19 pandemic. Meanwhile, we saw monthly loan disbursements in Sept20 expand by a strong 12.2% mom as it was back to the normalized level of RM100bn/month (with 70% of the monthly disbursement to business sectors) compared to the weaker month in August. At this juncture, it is still too early to tell if the system loan growth is sustainable, due to concerns over a prolonged high unemployment trend and business closures, which would likely result in potential write-offs of loan exposures (in sectors such as O&G, construction, realestate, transportation, tourism and households). We maintain our loan growth target at +2.5% yoy for 2020.

Details of September Loans Growth Trends

i) Business loans saw a 2.7% yoy growth, while mom recovered by a mediocre 0.2%. Disbursement activities recovered, growing by 16.8% mom, largely driven by the healthcare, wholesale/retail and manufacturing sectors.

ii) Household loans were up 5.2% yoy, mainly driven by growth in residential mortgages (+7.5% yoy) and personal financing (+6.9 yoy) in particular. New loan approvals and disbursements were largely intact (for residential, auto, personal financing, credit cards).

Gross impaired loans declined 7% ytd; GIL ratio improved to 1.38% in Sept

System GIL ratio saw some improvement from 1.4% in August to 1.38% in Sept, largely due to a decline in household impaired loans from August. To our surprise, system impaired loans saw a decline of 7% ytd due to the sharp decline in household impaired loans. Meanwhile, there could be some delayed impact on the classification of nonperforming loans due to the moratorium granted by BNM.

Source: Affin Hwang Research - 2 Nov 2020