• November’s GIL ratio rose to 1.53% from 1.41% in October. Increase in month-on-month impaired loans were driven primarily by households. Nonetheless, this was expected after the loan moratorium ended in Sept20.
• The pace of loan growth moderated after seeing a robust pick up in 3Q20. System loans was down a marginal 0.1% mom in Nov20, while new loan disbursement, applications and approvals saw a moderation mom.
• Maintain NEUTRAL on the banking sector. Though banks continue to set aside pre-emptive provisions, the vulnerable sectors, which are yet classified as impaired, remain the biggest threat to earnings in 2021. Key upside/downside risks are a shorter/longer unemployment trend and less/more business closures.

Domestic credit demand grew 3.8% yoy in November; +3% year-to-date

Ytd, the banking system loans saw more robust demand in 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. As at Nov20, system loans grew 3.8% yoy (households + 5% yoy; business +1.2% yoy) while ytd, loans were up 3% (our 2020 target is 3.5%). On the other hand, new loan applications and disbursements moderated, down 1% mom and 2.4% mom while loan approvals were sustained at RM34bn compared to Oct20.

Details of November loans growth trends

i) Business loans saw moderation in growth to 1.2% yoy in Nov20 (vs. 2.5% yoy in Oct20) while mom declined by a marginal 0.7%. Disbursement activities were sustained, though was down 3.4% mom and 2.4% yoy. The wholesale/retail and manufacturing sectors were the beneficiaries of new loan disbursements.

ii) Household loans sustained at a growth rate of 5.0% yoy in Nov20, mainly driven by growth in residential mortgages (+7.1% yoy), auto (+5.1% yoy) and personal financing (+6.4 yoy) in particular. New loan approvals and disbursements were largely intact (for residential, auto, personal financing, credit cards).

Gross impaired loans crept up 8.3% mom; GIL ratio saw uptick to 1.53% in Nov

The system impaired loans crept up 8.3% mom, largely underpinned by the household sector which saw a 21.4% mom increase in impaired loans (primarily mortgages). As a result, the system gross impaired loan ratio edged up from 1.41% in Oct20 to 1.53% in Nov20. In tandem, banks have also stepped up the collective allowance coverage in Oct-Nov20, amounting to RM3.35bn.

Banking system LCR not affected despite the loan moratorium

The banking system continues to operate at a comfortable Liquidity Coverage Ratio (LCR, Fig 29) of 150% (with excess liquidity of RM219.7bn), while the loan-to-fund ratio remained relatively stable at 82.4% in November, despite having to meet liquidity needs during the 6-month moratorium period.

To recap, BNM has given banking institutions some flexibility in the LCR (allowed to be maintained below 100%) and net-stable-funding-ratio (NSFR) requirement, which has been lowered to 80% during this pandemic (only to revert to 100% from 30 September 2021).

Robust CASA growth eases NIM pressure as average lending rate declines

The spread between the ALR and the 12-month FD rate was down to 1.78% as at Nov20 compared to circa 1.9% in 2Q20-3Q20, as the average lending rate continued to decline. Decline in the 12-month FD rate (yoy and qoq) and robust growth in CASA of 23% yoy (and all-time high CASA ratio of 30.7%) indicate that banks NIM pressure continued easing in 2H20 vis-à-vis 1H20.

Maintain NEUTRAL on the banking sector

We maintain our sector NEUTRAL call, as we do not believe that the banking sector is completely out of the woods. We are of the view that although sector net earnings may potentially recover by 16% yoy in 2021E (vs. a 26.2% yoy decline in 2020E), the earnings recovery is off 2020’s low base and this translates into a feeble 2020E/21E/22E core ROE of 7.1%/7.9%/8.4% (which is potentially below an investor’s required return). In comparison, the sector’s projected ROE remains a far cry from the 15% ROE seen in 2010-12 and around 11-14% in 2013-15.

The banks’ balance sheet and liquidity positions could potentially be subject to more stress in in 2H21 due to a higher risk of default as economic circumstances remain uncertain. To recap, BNM in its 1H20 Financial Stability Review had projected that the system GIL ratio could potentially rise to 3.1% by end-2020 and 4.1% by end 2021 under its macro simulation for businesses and households (with higher risk in 2H21 due to maturity of some bullet loan repayments). On a positive note, we take comfort in the banking system’s strong capitalization levels (CET1 ratio at 14.5% and Total Capital Ratio at 18.5% as at end-Nov 2020) while the capital buffer (in excess of regulatory requirement) of RM126bn as at end-Nov2020, remains fairly robust.

Based on our assumptions for the banking sector for 2021E, we are expecting: i) system loans to grow by 3.5% yoy; ii) NIM of 2.03%; iii) net credit cost at 62bps; and iv) CIR at 47%.

Our preferred stock pick is Aeon Credit (ACSM MK, RM9.12, BUY; TP RM14.00 based on 14x CY21E EPS). The company continues to find niche opportunities amid the COVID-19 pandemic, which has fuelled stronger motorcycle sales (due to ecommerce growth), auto (used-car) sales and the need for more personal financing (cheaper means of credit-card refinancing). Its digitization initiatives have resulted in higher operating efficiency and more extensive market penetration with lower marketing expenditure. We look to a recovery year in FY22E, with receivables growth of 7.9% yoy (vs. 5.7% yoy in FY21E) and a lower net credit cost of 362bps (vs. 456bps in FY21E). Downside risks to our call: rising unemployment rate and increased defaults.

Source: Affin Hwang Research - 4 Jan 2021