December 2019 loans ended at a flattish +4% growth YoY with Households staying resilient at +5% YoY and Business at +3% YoY. Asset quality improved with GIL ending lower at 1.51%. With accommodative interest rates and when the noise around the Wuhan virus scare subsides, loans momentum will likely gain traction. Our sector call remains OVERWEIGHT as stocks’ valuations are attractive. In fact, we have OUTPERFORM calls on most banks under our coverage: - AFFIN (TP: RM2.45), ABMB (TP: RM3.45), AMBANK (TP: RM4.75), 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.

In 2019, loans growth moderated to +4% vs 2018 loans of +7% YoY. We saw improvements in Dec 2019 when loans picked up, adding 30bps QoQ to +1.4% with Households and Business adding 30bps and 20bps, respectively, to end at +1.6% QoQ and +1.1% QoQ. Household disbursements which grew +6.2% YoY (vs +10% YoY) helped overall disbursement to rebound +0.5% YoY despite Business disbursement continuing to decline 1.2% YoY albeit at a moderated decline versus November’s -5.6% YoY. Overall Household loans remained steadfast driven by a resilient mortgage ending +7.3% YoY for December 19 (vs Nov 19: +7.3% YoY), while Business saw significant uptick in both mortgage and construction at 40bps and 210bps, respectively, to end December at +3.1% YoY and +5.6%, respectively. Demand for corporate bonds increased 60bps to +8% YoY for December 2019, ending net financing for the year at +4.7% YoY (vs Nov 19: +4.4% YoY). Coming from a low interest rate regime, loan approvals ended the year at +8% YoY (vs Nov 19: +3% YoY). Business approvals rebounded +4% YoY while Households ended the year +12% YoY (or 2ppt MoM).

Asset quality continued to improve since August 2019 with both Gross Impaired Loans (GIL) and Net Impaired Loans (NIL) shedding 9bps and 6bps to end at 1.51% and 0.96%, respectively, for December 2019. Decline in GIL was broad-based notably coming from Business shedding 14bps MoM to 1.92% while Households shed 3bps to 1.12% Further confidence in asset quality can be seen with loans loss provisions declining 4% YoY while Loan Loss Coverage remained resilient at 89.6%. Slower pace of loans saw moderating December deposits adding another 30bps to +3% YoY to RM1,970b. December saw CASA outpacing Fixed Deposits (+7% vs +3% YoY) indicating deposits competition was put on hold as loans moderated. Liquidity remained ample with Loan-to-Deposit Ratio (LDR) and Loan-to-Fund Ratio (LTF) at 90% and 83%, respectively, with resilient excess liquidity at 10%. However, average lending rate fell 3bps in December to 4.70% indicating NIM might be under pressure due to competitive lending rates.

Moving forward, we expect that accommodative interest rates will continue to support a resilient Household mitigating the moderation in Business spending. We expect 2020 loans to end at 4.5-5% growth YoY, driven by resilient Household (5.3 – 6.9%) and Business (2.8 – 3.8%) coming from a fiscal push expected in 2H2020. While we expect moderation in loans (mostly from Business and the Service sector mainly due to the effect of the nCOV2019 virus in 1H2020) we expect the Household to be resilient on account of the benign interest rate regime. Drawing from the SARS experience in 1H2003, loans outstanding moderated 30bps to +0.3 QoQ in 1QCY03 but improved 200bps to +2.3% QoQ on lower rates (after a 50bps cut in May 2003). In HP, personal loans and mortgages improved, ending at +1.8 QoQ, +1.8% QoQ and +4.8% QoQ respectively for 2QCY03. The improvement in asset quality coupled with declining loan loss provisions indicated the banks’ confidence in their asset quality which will support a higher risk appetite for the Banks especially coming from Households.

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), CIMB (TP: RM6.45), MAYBANK (TP: RM9.70), MBSB (TP: RM1.10), PBBANK (TP: RM22.10) and HLBANK (TP: RM18.90). BIMB (TP: RM4.70) and RHBBANK (TP: RM6.05) are at MARKET PERFORM. Our Top Pick is CIMB and MAYBANK benefitting from: (i) stable economy, (ii) fiscal push, and (iii) resilient Households plus attractive dividend yields of 4.4% and 7.0%, respectively.

Households remained resilient.

• Dec 2019 loans ended at +3.9% YoY (vs Dec 18: +7.0% YoY).
• QoQ saw pick up in outstanding loans at +1.4% QoQ (+30bps); led by Households by 30bps to +1.6% QoQ with Business at +1.1% QoQ (or by 20bps).
• 2019 loans driven by Households at +5.1% YoY (Dec 18: +8.9% YoY). Business also saw moderation at +2.6% YoY (vs Dec 18: +6.4% YoY).
• Moderation in loans for 2019 can also be attributed to lower disbursements at +0.5% YoY (vs Dec 18: +12.1% YoY). Repayments also fell at 2.2% YoY vs Dec 18 of 21.4% YoY.
• Business loans were driven by purchase on non-residential property at +3.1% YoY (vs Nov 19: +2.7% YoY) and construction at +5.6% YoY (vs Nov 19: +3.5% YoY).
• Households were driven by a resilient residential property at +7.3% YoY (Nov 19: +7.3% YoY).
• Overall net financing growth in the system saw a 30bps uptick (from November) to +4.7% YoY, driven by corporate bonds (adding 60bps to +8% YoY) with loans up by 10bps to +3.5% YoY.

Source: Kenanga Research - 4 Feb 2020