April system loans growth was steady at 4% YoY, unchanged vs. Mar 2020. Business loans expanded by a marginally faster clip of 5% YoY in Apr, while Household (HH) loans growth moderated further to 3% YoY. With the loan moratorium impact kicking in, applications, approvals, disbursements and repayments from HH declined significantly MoM and YoY. Loan demand from businesses, however, remained strong, especially for working capital loans. Meanwhile, asset quality was stable given that the staging of loans under moratorium has been frozen. We keep our NEUTRAL call on the sector with RHB (OP, TP: RM5.15) and ABMB (OP, TP: RM2.30) as our preferred picks.

YoY loan growth momentum was sustained in Apr at 4% YoY, with business loans growth gaining pace (+5% YoY vs. Mar 20: +4% YoY) while HH loan growth moderated further to +3% YoY (Mar 20: +4% YoY). Notably, with the loan moratorium for HH and SMEs taking effect, HH loan repayments and disbursements have halved, relative to Mar levels. Bulk of HH loan repayments went to credit cards while disbursements were mainly for credit cards and loans for the purchase of securities. In a similar vein, HH loan applications slid 66% MoM (-74% YoY), with the drop particularly severe for auto loan applications (- 87% MoM/-89% YoY) while residential mortgage applications were down 62% MoM (-72% YoY). HH loan approvals dropped 69% MoM (-78% YoY) reflecting the decline in approvals for the abovementioned big ticket items.

As for business loans, applications were up 15% MoM (-7% YoY) with broad based strong demand, except from construction (- 7% MoM/-35% YoY) and property (-39% MoM/-50% YoY) – likely due to lack of works progress. Business loan approvals rose 2% MoM (-12% YoY), driven by loan approvals in sectors such as electricity, gas and water supply; wholesale trade, restaurants and hotels; business activities and education, health and others.

Looking ahead, we expect to see a MoM rebound in applications and approvals as businesses reopen and individuals return to work. Key trends to watch out for, in our view, include the amount of time required before we see the level of household loan applications as well as approvals returning to pre-MCO levels, and HH loan growth momentum (potential pickup in HH loan disbursements while HH loan repayments continue to be curtailed by the moratorium).

In terms of asset quality, system gross impaired loans (GIL) declined 1% MoM (+7% YoY) as household impaired loans eased 4% MoM (+11% YoY), partly offset by a marginal increase of 2% MoM in business impaired loans (+5% YoY). By sector, the rise in business impaired loans came from finance, insurance and business activities (+6% MoM/-7% YoY). System GIL ratio was relatively stable at 1.6%, with household impaired loans ratio at 1.1% and business impaired loans ratio at 2.3%. As loan staging for loans that are under moratorium are now frozen, we expect household asset quality to remain relatively stable during this period. Near-term upside risk to GIL would largely come from the corporate sector, in our view.

YoY, Apr deposit growth was stable at c.4% (Mar 2020: 4%) but flat MoM, mirroring loan growth trend. CASA growth picked up pace to +13% YoY, as compared to +10% YoY in Mar while higher cost deposits, i.e. fixed deposits and negotiable instruments of deposits, were down 3% YoY, similar to Mar. By holders, individual deposits rose 6% YoY (Mar 20: +5% YoY), but deposits from businesses continued its YoY decline at 2% (Mar 20: -2% YoY). Overall, liquidity and capital requirements appear comfortable.

Maintain NEUTRAL sector call. In our view, banks earnings ahead remain uncertain and volatile, as a combination of factors such as Day One modification losses and rising credit cost kick in. The path to recovery too is unlikely to be clear cut. In mitigation, the reopening of the economy and significant cuts to policy rate has helped clear some overhang for the sector. Our preferred 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. Near-term key upside risk to our sector call is a liquidity fuelled rally and/or rotational play into value/cyclicals. Key near-term downside risk is the emergence of a Covid-19 second wave.

Source: Kenanga Research - 1 Jun 2020