August 2020 system loans growth held steady at 4% YoY as household loan growth gathered pace (+4.8% YoY vs. July: +4.3% YoY), offset by a slowdown in business loan growth (+3.7% YoY vs. July: +4.7% YoY). We believe the recent rise in household loan applications and approvals (mainly auto and residential mortgages) were converted into disbursements while for the non-household segment, growth was impacted by net repayments. Meanwhile, asset quality trend remained consistent with the trend in recent months with system gross impaired loans down 1% MoM (-9% YoY) as borrowers took the opportunity to regularise their accounts during the loan moratorium period. Loan loss coverage rose further to 98% from 96% in July on a combination of improved asset quality and a slight build-up in reserve coverage. We keep our NEUTRAL call on the sector with HLBK, PBK and RHB as our preferred picks. We also like AMMB as a catchup play.

August 2020 system loan was stable at 4.4% YoY (July: +4.5% YoY) with household loan growth gathering pace at 4.8% YoY (July: 4.3% YoY), offset by slippage from the non-household segment (+3.7% YoY vs July: +4.7% YoY) due to net repayments during the month. For the household segment, the earlier pick-up noted in applications and approvals for auto and residential mortgages continued to be converted into loan disbursements. Meanwhile, household loan repayments were steady at RM22.8b in August, as compared to RM22.7b in Jul and up from RM15b in April. As for the business segment, as highlighted above, repayments outpaced disbursements in August, which was largely noted across the various sectors except for the wholesale & retail trade, and restaurants & hotels, as well as real estate sectors.

In terms of loan leading indicators, system loan demand slackened – down 14% MoM and YoY with applications from households falling 9% MoM (+10% YoY) while non-household loan applications slipped 23% MoM (-39% YoY). The MoM decline in household loan applications was from auto, residential mortgages and personal loans, although it may be too early to conclude at this stage that the recent bump-up in demand is over. As for the business segment, the key sectors that led the drop came from manufacturing, construction, transport, storage and communication and finance, insurance and business activities. Meanwhile, system loan approvals fell 4% MoM (-13% YoY), predominantly due to lower business loan approvals (-9% MoM/- 25% YoY) while household loan approvals were more resilient (-1% MoM/-3% YoY). Drivers for the MoM drop in business loan approvals were manufacturing and transport, storage and communication.

As for asset quality, system gross impaired loans (GIL) continued to fall (-1% MoM/-9% YoY) as households took advantage of the loan moratorium period to catch up on repayments and regularise their accounts. Household impaired loans were down 4% MoM (-14% YoY) in Aug. As for business impaired loans, asset quality was stable MoM (-6% YoY). System GIL ratio was marginally lower at 1.40% vs 1.43% in July with household/business impaired loan ratios at 0.9%/2.2%, respectively. System loan impairments reserve was up 2% MoM, suggesting continued build-up in loan loss reserves by banks. Thus, system loan loss coverage (LLC) rose further to 98.4% as compared to 95.5% in July 2020 (August 2019: 82.6%).

YoY, August 2020 total deposits growth was unchanged at 5%. Deposits from individuals were up 7% YoY while business deposits rose by a faster clip of 4% YoY as compared to July’s +2% YoY. CASA growth remained robust at 20% YoY (July: +18% YoY) while fixed deposits were flat YoY. As mentioned previously, it remains to be seen whether the robust CASA growth can be sustained post the automatic loan moratorium period. System LDR was stable MoM at 87% while liquidity coverage ratio is still ample at 149%, supporting banks` expectations that LCR should remain stable during the moratorium period.

Finally, system CET-1 ratio ticked up further to 14.6% from 14.4% in July. The absence of interim dividends by most banks during the recent 2QCY20 results season has helped banks to shore up capital further. With that, banks should be able to continue building up capital for the remainder of the year.

Maintain NEUTRAL sector call. We think asset quality will likely to be the key swing factor to earnings in the coming quarters and thus, keep with our preference for banks with solid asset quality such as HLBK (OP; TP: RM17.00) and PBK (OP; TP: RM18.00). Their asset quality track records suggest that the pre-emptive loan provisions required should be lower relative to peers while the smaller exposure to the corporate space would shield them from chunky loan impairments. Thus, we see these banks offering investors better earnings predictability and “safer” dividend yields (assuming banks continue to be conservative with dividend pay-outs). We also like RHB (OP; TP: RM5.75) for its capital strength. While this may not translate to higher dividend pay-outs vs peers in the near term, RHB should be able to resume with its capital management plans relatively quick once the pandemic is past (vs peers that may need time to rebuild their capital positions). AMMB (OP; TP: RM3.60) is our pick for a catch-up play.

Near-term key upside risk to our sector call is a liquidity fuelled rally and/or rotation into value/cyclicals. Key near-term downside risk is if an economic lockdown is required should a Covid-19 second wave emerges

Source: Kenanga Research - 1 Oct 2020