March loans saw a slight growth by 20bps of +4.0% YoY as Business loans uptick was offset by moderating Household (HH) loans. Asset quality continued to be stable. Downside risks continued, given the growing economic challenges; thus, we have revised our earnings revision together with some of the changes in stock recommendations, prompting us to downgrade the sector to NEUTRAL. Our refreshed top picks are RHB (OP, TP: RM5.15) and ABMB (OP, TP: RM2.30), given that their earnings appear relatively shielded from developments within the HP space.

Loans in the system showed resilience with a +4.0% growth (Feb 20: +3.9% YoY) to RM1,783b. Repayments contraction (-8% YoY vs Feb +7.3% YoY) outpaced Disbursements (-5.2% YoY vs Feb +13.2% YoY) pushing the slight uptick in loans. The southward disbursement in March was exacerbated by both Business and Households contracting 1.5% YoY and 16.4% YoY, respectively, reflecting the downbeat sentiment due to the pandemic and the Mandatory Control Order (MCO) in March. Uptick in Business loans for March was boosted by the growing demand for Working Capital (+3.6% YoY) and Construction (+8.9 vs Feb 20: +9.2%). HH loans for March slowed as mortgages slowed by 20bps to +7.4% while HP continued to shrink by 1.2% YoY from 0.8% contraction in Feb.

Looking ahead, the slowdown in loans is inevitable given the rising pandemic and economic uncertainties compounded with the applications and approvals shrinking significantly in March. Both Business and HH applications fell 3.6% YoY and 15.9% YoY, respectively. Approvals shrank 22.5% YoY as both Business and HH contracted 23.2% YoY and 21.7% YoY, respectively. Overall approval rate in the system ended 50bps lower to 42%, underpinned by Business contraction of 180bps to 43.1% while HH saw a 50bps uptick to 40.7%.

Asset quality continued to show resilience as Gross Impaired Loans (GIL) saw just a 2bps uptick to 1.59%. Net Impaired Loans (NIL) saw stability ending March at 0.96% (vs. Feb of 0.96%). Quality of Business loans remained stable at 0.96% while HH saw slight uptick (2bps) to 0.61%. Given the moratorium introduced in March, we believe asset quality will remain fairly stable although we do not discount significant uptick in October (as moratorium ends in September).

Deposits continued to moderate (+2.1% vs. Feb of +2.6%) outpaced by loans (+4.0% YoY) as credit demand waned. March saw deposits driven by demand in CASA at +10.3% YoY (vs. Feb 20: +5.7% YoY) while Fixed Deposits was marginally flat. We view this positively as the banks strived to mitigate NIM compression given the OPR cuts in Jan and March. While Loan to Deposit (LDR) and Loan to Fund Ratio (LTF) remained stable at 91% and 83%, respectively, excess liquidity continued to shrink by 13ppts YoY to 9.4% (vs. Feb 20 of 9.6%) indicating NIM will continue to remain under pressure should credit demand turned northwards in 2H 2020.

Moving forward, the banking system will be hard pressed given the downside risks as economic uncertainties continue to prevail given the inconclusiveness of the growing pandemic. While loans will be marginally flat for 2020, we do not discount slight growth given the undisbursed mortgage loans. While asset quality looks fairly stable given the moratorium in place, we do not discount uptick in provisioning ahead post the moratorium given prevailing economic risks. We expect further pressure on earnings given the expected modification loss adjustments on the fixed rate HP loans.

We have cut our FY20E-21E net profit forecasts by up to 20% for the banks under coverage. Note that the extent of our earnings revisions are not as severe as perceived as we had already revised down our earnings significantly over the past two months and we believe, for example, our earlier assumptions of 10-15bps NIM compression in 2020 have some “buffer” to absorb developments such as this. Also, we await further updates from the banks with respect to the issue.

Downgrading sector call to NEUTRAL from OVERWEIGHT. The significance of the earnings revisions together with some of the changes in stock recommendations prompted us to downgrade our call on the sector to NEUTRAL from OVERWEIGHT. The reopening of the economy and recent OPR cut has helped clear some overhang for the sector, but the recent development on HP interest will likely put further near term pressure on banks’ income and this, by our calculations, could be meaningful. Our refreshed top picks are RHB (OP, TP: RM5.15) and ABMB (OP, TP: RM2.30), given that earnings appear relatively shielded from the developments within the HP space.

Source: Kenanga Research - 8 May 2020