October 2020 saw system loans momentum moderated slightly (+4.3% YoY) as the CMCO kicked in while the curtains fell on the loan moratorium period for individuals and SMEs. Household disbursements fell 7% YoY despite double-digit loan applications in the preceding month. Leading indicators are not favorable as demand for Business fell with Households moderated for October with subdued applications. Liquidity was still ample at 10.5% with LDR and LTFE stable at 89% and 72%, respectively. While GIL saw slight uptick to 1.4%, loan loss reserve continued to amplify to 110%. The recent reporting season saw the banks maintaining a cautious outlook with additional provisioning. We keep our NEUTRAL call on the sector with preference for banks with solid asset quality (HLBK, PBK and BIMB). We also like RHB for its solid capital position.

The start of the CMCO in mid-October saw system loans losing pace coming at +0.1% MoM/+4.3% YoY (Sep 2020: 0.5% MoM/4.4% YoY). Both Business and Household lost their momentum - Business at - 0.1% MoM/+2.5% YoY vs Sep: +0.2% MoM/+2.6% YoY) with Household at +0.4% MoM/+6.0% YoY vs Sep: +0.8% MoM/+6.1% YoY). The moderate pace was compounded by Repayments (+1.6% YoY) outpacing Disbursements (+1.5% YoY-dragged by Household at -6.8%). Repayments were driven by Business inching 80bps MoM to +5.0% YoY while Households declined 7.7% YoY. Business disbursements (rebounding +4.9%) were underpinned by Financial and Education & Health sectors while the Household’s drag was broad-based but mitigated by the HP industry (+17% vs Sep: +35%).

In terms of loan leading indicators, system loans demand declined 6% YoY vs Sep: +16% YoY with falling Business demand continuing its momentum (-23% YoY vs Sep: -13% YoY). Not surprisingly, Household was cautious in the CMCO period with demand moderated to +11% YoY vs Sep: +46% YoY). Approvals was subdued at +1%b YoY vs Sep: +4%) with Business (-6% YoY vs Sep: -15% YoY) but Households remained positive albeit at a slower pace (+7% YoY vs Sep: +25 YoY), led by Mortgages (+6% YoY), HP (+34% YoY) and Personal Use (+5% YoY.)

System gross impaired loans (GIL) continued to fall YoY at 8% but saw uptick +3% MoM. Both Business and Households GIL fell 5% and 13% YoY, respectively, but Households saw +10% uptick MoM as the Moratorium ends while Business was stable. System GIL ratio saw a 5bps uptick MoM to 1.43% with Business GIL ratio continued to be stable for the 3rd consecutive months at 0.94% but Household saw 9bps uptick MoM to 0.95%. On a positive note, as asset quality deteriorated slightly, build-up of loan loss reserve gathered pace at +8% MoM/+14% YoY (Sep: +6% MoM/+6% YoY). Thus, system loan loss coverage (LLC) rose further to 110% or 4ppt MoM.

YoY, October’s total deposits growth moderated at +4% vs September’s +5%. Deposits from individuals continued at the same pace +7% YoY as in September while business deposits were flat (Sep: +2%) October’s CASA growth gained pace at 22% (vs Sep: +20%) while fixed deposits continued its decline at 4% YoY (Sep: -3% YoY). We believe CASA growth might still maintain its momentum, positively impacting NIMs for banks given the lower spread between CASAs and FDs. System LDR continued to be stable MoM at 89% coupled with LTFE (Loan to Fund Equity Ratio) maintaining its stability at 72%. Excess liquidity ratio continued to be stable albeit falling 30bps MoM to 10.5% given the moderation in both loans and deposits.

Finally, system CET-1 ratio was unchanged MoM at 14.6%. The absence of interim dividends from most banks during the recent 3QCY20 results season support the view that the banks are shoring up their capital further.

Maintain NEUTRAL sector call. We continue the view that asset quality will likely be the key swing factor to earnings in the coming quarters. The recent reporting season shows further loans loss provisioning by the banks with earnings visibility still opaque. We maintain our preference for banks with solid asset quality such as HLBK (OP; TP: RM18.50) and PBK (OP; TP: RM20.25). 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 should 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: RM6.30) 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 its capital management plans relatively quick once the pandemic is past (vs peers that may need time to rebuild their capital positions). BIMB (OP; TP: RM4.95) is our pick as a catch-up play as it offers a cheaper entry into Takaful Malaysia. Furthermore, its asset quality is solid after PBK and HLBK. Its dividend declared in the recent reporting quarters implies robust asset quality and that it is likely to see minimal impact post the targeted assistance program.

Source: Kenanga Research - 2 Dec 2020