May 2020 system loans growth was just marginally slower at 3.9% YoY vs. Apr 2020 of 4% YoY, as the pace of growth for both household (HH) and business loans eased in May. Loan leading indicators were also somewhat disappointing as both system loan applications and approvals were flat MoM despite businesses re-opening and individuals returning to work. On the flipside, asset quality appears well preserved with system gross impaired loans down 1% MoM. System loan loss coverage, however, rose further to 89% from 86% in Apr (Mar: 82%), which likely signalled banks are booking in further pre-emptive loan provisioning in 2QCY20. We keep our NEUTRAL call on the sector with RHB (OP, TP: RM6.00) as our top sector pick.

MoM loan growth in May 2020 continued to remain muted and hence, YoY growth was marginally lower at 3.9% (Apr 2020: +4% YoY). The pace of lending to households (HH) continued to moderate, at 3.2% YoY in May vs. Apr 2020: +3.3% YoY. Residential mortgages and personal loans were the key drivers of YoY growth. Similarly, loans to businesses also moderated in May, to 4.9% YoY vs. Apr 2020: 5.1%. Not surprisingly, lending to construction (+1% YoY) and real estate (-1% YoY) remained soft. HH loan repayments and disbursements continued to be impacted by the loan moratorium with repayment and disbursement levels c.43% lower from a year ago. However, we note a pick-up in HH loan disbursements in May (+44% MoM) thanks to disbursements for auto and residential mortgages.

In terms of loan leading indicators, overall system loan applications and approvals were flat MoM (-39% YoY/-54% YoY respectively), which was somewhat disappointing as we had hoped to see a MoM rebound as businesses re-opened and individuals returned to work. That said, the headline trend masked a strong recovery in HH loan applications (+64% MoM) and approvals (+53% MoM), which was offset by a drop in business loan demand (-19% MoM) and approvals (-16% MoM). The MoM jump in HH loan applications and approvals were both driven by auto financing and residential mortgages. As for business loans, applications and approvals were broadly lower across the various sectors.

As for asset quality, system gross impaired loans (GIL) continued to remain under control with a further MoM decline of 1% (+5% YoY) as household impaired loans eased 4% MoM (+5% YoY) while business impaired loans were stable vs. Apr (+5% YoY). By sector, we note a spike in impaired loans to the manufacturing sector (+9% MoM/+61% YoY), but other “vulnerable” sectors such as wholesale & retail trade, restaurants and hotels (+2% MoM/-6% YoY) and finance, insurance and business activities (-1% MoM/-7% YoY) were well contained. Overall, system GIL ratio was relatively stable at 1.6%, with household impaired loans ratio at 1.0% and business impaired loans ratio at 2.3%. As mentioned previously, loan staging for loans that are under moratorium are now frozen. Thus, we expect household asset quality to remain relatively stable during this period. Nearterm upside risk to GIL would largely come from the corporate sector, in our view. While asset quality appears stable, system loan loss coverage (LLC) rose further to 89%, as compared to 86% in Apr 2020 and 82% in Mar 2020 as c.RM1.6b was added to loan loss coverage. We think that this likely signalled banks are booking in further pre-emptive provisioning in the upcoming 2QCY20 results.

YoY, May 2020 deposit growth was stable at c.4% (Apr 2020: 4%) but flat MoM. As noted from the recent 1QCY20 results, CASA growth picked up pace to +14% YoY, as compared to +13% YoY in Apr while higher cost deposits, i.e. fixed deposits and negotiable instruments of deposits, were down 1% YoY (Apr: -3% YoY). By holders, individual deposits rose 6% YoY (Apr 20: +6% YoY), partly aided by the loan moratorium, we believe, but deposits from businesses continued its YoY decline at -1% (Apr 20: -2% YoY).

Maintain NEUTRAL sector call. In our view, banks earnings ahead remain uncertain and volatile while the path to recovery is unlikely to be clear cut. Early signs from the banking statistics suggest that pre-emptive loan provisioning may see an acceleration in 2Q. In mitigation, the reopening of the economy and significant cuts to policy rate have helped clear some overhang for the sector. Also, Day One Modification losses may not be as bad as feared. RHB (OP, TP: RM6.00) is our top sector pick on attractive valuations and solid capital ratios to absorb higher loan allowances while maintaining a decent dividend payout. In addition, it is less impacted by Day One modification losses. We also like Hong Leong Bank (OP; TP: RM17.00) as a defensive, “high quality” bank with a strong digital infrastructure that is poised to benefit from a post Covid-19 environment. AMMB’s (OP; TP: RM3.60) valuations appear undemanding and we think the stock could be an attractive catch-up play. Furthermore, AMMB had booked in aggressive pre-emptive loan provisioning during its 4QFY20 results, which could help keep further allowances ahead in check while management’s recent guidance on Day One Modification losses seem much lower than initial estimates. 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 Jul 2020