October loans growth remained a dampener at +3.7% YoY but Households loans were still resilient. Households disbursement remained strong with applications and approvals picking up YoY and MoM. Both asset quality and approvals in the system stayed resilient and stable; coupled with accommodative interest rates, loans momentum will likely gain traction ahead. Our sector call remains OVERWEIGHT as valuations are attractive. In fact, most banks under our coverage are OUTPERFORM: - AFFIN (TP: RM2.45), ABMB (TP: RM3.45), AMBANK (TP: RM4.75), BIMB (TP: RM4.80), CIMB (TP: RM6.45), MAYBANK (TP: RM9.70), MBSB (TP: RM1.10), PBBANK (TP: RM22.10) and HLBANK (TP: RM18.90). RHBBANK (TP: RM6.05) is a MARKET PERFORM with share price close to its Fair Value.

Household disbursements gaining traction. Oct loans were marginally slower at +3.7% YoY (Sep 2019: +3.8% YoY) to RM1,752b. On a MoM basis, loans moderated 30bps to +0.2% YoY. While Business loans moderated 30bps to +2.6% YoY, Households (HH) remained resilient gaining another 10bps to 4.9% YoY. The flattish trend can also be attributed to the pace of Repayments shrinking (-7.8% YoY) similar to the pace in Disbursements (-7.9% YoY) vs Sep 19: at -4.5% YoY and -3.5% YoY respectively. HH disbursements continued to be on an uptrend adding another 280bps to +8.8% YoY, offsetting further shrinkage from Business disbursements (-13.3% YoY vs Sep 19: -6.4% YoY).

Moderation in Business underpinned by slowdown in demand for working capital (-30bps to +1.3% YoY), offset by moderation in demand for purchase of securities by 40bps to +4.8% YoY. HH was underpinned by resilient purchase for residential property at +7.2%.

Overall net financing in the system saw a moderation by another 20bps to +4.6% YoY, dragged by a slowdown in demand for corporate bonds by 90bps to +8.1% YoY, offset by resilient loans at +3.5% YoY.

Loans application rebounded led by Households. Loans application rebounded +3.2 (vs Sep 19: -6.1% YoY) following 2 months of contraction, as Business applications rebounded +4.8% YoY (Sep 19: -12.5% YoY). Households moderated slightly by 10bps to +1.7% YoY. However, approvals fell 12.8% YoY led by Business falling 23.3% YoY with HH remaining relatively flat. On a Mom basis, Business approvals fell 12% MoM but HH rebounded +16% MoM.

Lending and Funding rates stable. Following sombre credit demand, deposits continued to moderate, easing another 30bps to +3.9 YoY to RM1,964b – with deposits easing outpacing loans, excess liquidity saw a 30bps uptick to +11%. FDs demand eased another 60bps to +5.3% indicating tapering competition for liquidity, easing NIM downside pressure on NIM. CASA ratio was relatively flat at 26%. Loan-to-deposit (LDR) ratio and Loan-to-Fund (LTF) ratio were relatively stable at 89% and 83%, respectively. 6-12 months FDs rate remained flat indicating deposits are fully re-priced in tandem with flattish average lending rate at 4.76%.

No change in asset quality. Gross Impaired Loans (GIL) and Net Impaired Loans (NIL) remained stable at 1.62% and 1.05%, respectively. Both Business and HH assets’ quality remained unchanged with both GIL resilient at 1.03% and 0.58%, respectively. Provisioning continued to fall by another 3% YoY with Loan Loss Coverage (LLC) falling 10ppt YoY and 40bps MoM to 88.4% indicating the system’s confidence in the strength of their asset quality.

While it was another dampening month in October for loans, we take heart that Household loans are still resilient on account of the accommodative interest rates. The shrinking demand and declining approval rate for Business in October is not unexpected as Budget 2020 did not address new Business spending coupled with the on-going US-China trade tension. The accommodative interest rates seemed to be gaining traction for the Households and we expect further credit demand from this segment in the coming months. Deposit competition is easing which will support the banks’ earnings ahead. Valuations of our banking universe are attractive and undemanding with most at OUTPERFORM: - AFFIN (TP: RM2.45), ABMB (TP: RM3.45), AMBANK (TP: RM4.75), BIMB (TP: RM4.80), CIMB (TP: RM6.45), MAYBANK (TP: RM9.70), MBSB (TP: RM1.10), PBBANK (TP: RM22.10) and HLBANK (TP: RM18.90). RHBBANK (TP: RM6.05) is at MARKET PERFORM with share price close to its Fair Value.

Source: Kenanga Research - 3 Dec 2019