• 2020 ended with system loan growth of 3.4% (relatively in-line with our target of 3.5%). New loan disbursement increased strongly in December, in particular for the business segment, though offset by higher repayments
   
• December’s GIL ratio rose further to 1.57% from 1.53% in November. Increase in impaired loans on month-on-month basis was driven primarily by the construction and transportation sectors
   
• Maintain NEUTRAL stance on the banking sector. Though banks continue to set aside pre-emptive provisions, the vulnerable sectors, which are yet to be classified as impaired, remain the biggest threat to earnings in 2021. Key upside/downside risks are a shorter/longer unemployment trend and fewer/more business closures

Domestic Credit Demand Grew 3.4% Yoy in December; +0.3% Mom

On a yoy basis, banking system loans grew by 3.4% underpinned by more robust demand in the healthcare and wholesale/retail/trade sectors, which needed additional loans to handle challenging conditions or cope with an unexpected surge in demand (such as e-commerce business, warehousing, delivery services, medical equipment/devices) during the COVID-19 pandemic. On a segmental basis, household loans expanded by 5% yoy while business loans grew by a marginal 1.0% yoy as this was partially offset by repayments of corporate loans. On the other hand, new loan applications and approvals moderated, down 5.6% mom and 1.4% mom, while loan disbursements have been robust to the business sectors.

Details of December Loan Growth Trends

i) Business loans saw moderation in growth to 1.0% yoy in 2020 (vs. 2.7% yoy in 2019) and were flat mom. Disbursement activities in Dec20 were notable in sectors such as construction, manufacturing and finance/business services. We saw higher repayments in sectors such as manufacturing and wholesale/retail in particular.

ii) Household loans were sustained at a growth rate of 5.0% yoy in Dec20, mainly driven by residential mortgages (+7% yoy), auto (+5% yoy) and personal financing (+6.2 yoy). New loan approvals and disbursements were largely intact (for residential, auto, personal financing, credit cards).

Gross impaired loans crept up 3.1% mom; GIL ratio saw uptick to 1.57% in Dec

System impaired loans crept up another 3.1% mom, underpinned by the construction (+19.4% mom) and transportation (+22.1% mom) sectors, while the rate of new impaired loans in the household sector moderated to 2.9% mom (vs. 21.4% mom in Nov20). In tandem, banks have stepped up collective allowance coverage in OctDec20 in order to buffer up against rising impaired loans.

Banking System LCR Not Affected Despite Loan Moratorium

The banking system continued to operate at a comfortable Liquidity Coverage Ratio (LCR, Fig 29) of 148% (with excess liquidity of RM212.4bn), while the loan-to-fund ratio remained relatively stable at 82.4% in December, despite having to meet liquidity needs during the 6-month moratorium period.

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

Steady Average Lending Rate Indicates Steady NIM

The spread between the ALR and the 12-month FD rate was down to 1.75% as at Dec20 compared to circa 1.9% in 2Q20-3Q20, as the average lending rate continued to decline. On the other hand, the decline in the 12-month FD rate (yoy and qoq) and robust growth in CASA of 19.3% yoy (to an all-time high CASA ratio of 30.3%) have helped ease banks’ NIM pressure in 2H20 vis-à-vis 1H20, despite the OPR cut which had affected loan yields.

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 feeble 2020E/21E/22E core ROEs of 7.1%/7.9%/8.4% (which are 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 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 14.6% and Total Capital Ratio at 18.3% as at end-Dec 2020) while the capital buffer (in excess of regulatory requirement) of RM129bn as at end-2020, remained fairly robust.

Based on our assumptions for the banking sector for 2021E, we expect: 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, RM10.82, BUY; TP RM13.50 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 FY22, 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 - 2 Feb 2021