September 2020 brought the curtain down on the loan moratorium period for individuals and SMEs. Overall, the statistics were not as bad as feared, e.g. (i) system loans growth stood at 4.4% YoY in Sep 2020 vs 2019 of 3.9%; (ii) system GIL down 6% vs end-2019, mainly due to lower household GIL while LLC jumped to 105% from 81% at end-Dec 2019; (iii) liquidity was ample with YoY deposit growth at 5.9%, system LDR eased to 87% (Dec 2019: 89%) while LCR rose further to 152% from 149% at end-2019; and (iv) CET-1 ratio was up 30bps from end-2019 to 14.6%, as banks conserved capital. The rise in household loan approvals (mainly auto and residential mortgages) in recent months will likely remain supportive of household loan growth ahead, but loan growth momentum for the non-household segment may be impacted by the strength of the macro recovery ahead. Near-term, we expect focus to be on the upcoming Budget 2021 - usually a neutral event for banks, but this is an unusual year. We keep our NEUTRAL call on the sector with preference for banks with solid asset quality (HLBK, PBK). We also like RHB for its solid capital position.

September 2020 system loan growth was 0.5% MoM/4.4% YoY, unchanged from the pace of growth in August. The household segment continued to underpin system loan growth with YoY growth momentum picking up to +5.2% YoY (+0.8% MoM vs August: +0.9% MoM/+4.8% YoY), offset by softer growth from the non-household segment (+3.2% YoY/+0.2% MoM vs August: +3.7% YoY/-0.2% MoM). For the household segment, growth received a lift from the earlier pick-up in applications and approvals for auto and residential mortgages, which continued to be converted into loan disbursements. Meanwhile, household loan repayments rose further to RM25b in September, as compared to RM22.8b in August and up from RM15b in April or at c. 91% of the average monthly repayment level in 1QCY20. As for the business segment, repayments broadly offset disbursements in September, especially for sectors such as electricity, gas and water supply, construction and transport, storage and communication.

In terms of loan leading indicators, system loan demand rebounded – up 13% MoM and 16% YoY with applications from households rising 12% MoM (+45% YoY) while non-household loan applications were up 14% MoM (-16% YoY). The MoM increase in household loan applications was broad-based, from personal loans to big ticket items such as auto and residential mortgages. As for the business segment, the key sectors that led the MoM raise came from wholesale trade, construction as well as transport, storage and communication. Meanwhile, system loan approvals were up 14% MoM (+4% YoY), with the MoM uptick driven by business loan approvals (+20% MoM but down 18% YoY) – wholesale trade, construction and finance, insurance and business activities. Meanwhile, household loan approvals rose 10% MoM (+25% YoY) with drivers that were similar as that for applications. The healthy loan approval numbers should be supportive of household loan growth ahead.

As for asset quality, system gross impaired loans (GIL) continued to fall (-1% MoM/-10% YoY) as households continued to take advantage of the loan moratorium period to catch up on repayments and regularise their accounts. Household impaired loans were down 3% MoM (-20% YoY) in Sep. As for business impaired loans, asset quality was stable MoM (-5% YoY). System GIL ratio was also stable at 1.4% with household/business impaired loan ratios at 0.8%/2.2%, respectively. Notably, while asset quality has improved, system loan impairments reserve was up 6% MoM. As compared to end-June 2020, system GIL fell 4% but loan impairment reserve was up 9%, which suggest banks continued with the build-up of loan loss reserves during the quarter, in anticipation of potential asset quality weaknesses ahead. Thus, system loan loss coverage (LLC) rose further to 105% as compared to 98.4% in August 2020 and 93% in June 2020.

YoY, September 2020 total deposits growth ticked up to 6% vs August’s +5%. Deposits from individuals were up 7% YoY while business deposits rose by a slower clip of 2% YoY as compared to August’s +4% YoY. CASA growth remained robust at 21% YoY (August: +20% YoY) while fixed deposits were flat YoY. We believe there may be some moderation in CASA growth once the broad-brush loan moratorium ends. System LDR was stable MoM at 87% while liquidity coverage ratio at the end of the moratorium was an ample at 152%.

Finally, system CET-1 ratio was unchanged MoM at 14.6%. 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 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 as a catch-up play.

Near-term upside risk to our sector call is a liquidity fuelled rally and/or rotation into value/cyclicals. Downside risk is if the lockdown seen both domestic and globally due to another Covid-19 wave derails the economic recovery.

Source: Kenanga Research - 2 Nov 2020