InNovember 2020, system loans continuedto pace higher (+3.8% YoY)as more borrowerscommit to residential housing purchases. However, new loan applications (-5%) were impeded by tighter screening, resulting in fewer overall approved loans (-4%). With the end of the loan moratorium, cracks have appearedas household repayments registered a 3% MoM decline,possibly due toconsumer facing tight cash flows. On theflipside, new household loans (+22% YoY, -3% MoM) remained steady with an influx of aspiring new house owners but new business loan applications (-5% YoY, -1% MoM) were slapped by the economic downturn. Gross impaired loan (GIL) ratio rose to 1.53% (+10bps MoM), which is also indicative of household asset quality starting to be at risk.Nonetheless, bank loan-to-deposit ratio (LDR) remains healthy at 84.5% with CASA deposits remaining steady. In the near-term, we still haveconcerns on industry asset quality with its accompanying impairments likely to put a drag on the sector. Because of this, we recommend investors to stick close to the resilient banks with a known track record of asset quality for better earnings resiliency. We maintain our NEUTRAL call on the sector with RHBBANK being our favourite on the back of its strong capital portfolio.

November 2020 system loan continued to tip higher(+3.8% YoY) on the back of household loan growth (+5.0% YoY) with a decelerated business loan growth (+2.1% YoY). However, there is an easing on a MoM basis on total system loans (-0.1%) as business loans retracted (-0.7%), though Household loans remained flat at +0.4% MoM (Oct 20: +0.3% MoM). In terms of repayments, business loans posted+5.0% YoY but saw hiccups in the wholesale & retail trade, restaurants and hotels as well as real estate segment. Housing loan repayments still kept up at RM27.6b (+2% YoY) but with a 3% MoM hiccup against Oct 2020 (refer to Tables 1-3 for breakdown of system loans).

Loan demand is tapering as applications posted -5% YoY, -1% MoM as there were overall fewer applications for business purpose (-30% YoY, +3% MoM). Several industries (mainly education, health, finance-related businesses, and agriculture) moved to scale down operations amidst the softer business climate. This coincided with the drop in business loan approvals by 21% YoY due to tighter underwriting by bank as economic conditions showed signs of distress. Still, an 8% MoM rebound illustrates that overall spending could be recovering. On the flipside, the construction sector registered an uptick (+22% YoY, +53% MoM) as projects have gradually resumed works after being held by movement controls. Meanwhile, application for household loans remained robust (+22% YoY, -3% MoM) as new borrowers appear to be taking advantage of low interest rates. Approvals rose 12% YoY but dropped 5% MoM which could reflect tighter screening (refer to Tables 4- 5 for breakdown of system loan applications).

Asset quality in November 2020 was slightly weaker, as GILtipped by 7% MoM with an overall GIL ratio of 1.53% (+10bps MoM). Business system loans continued to deteriorate but held a flattish GIL ratio of 2.19% as better mining and quarrying as well as transportation based industry performances offset the weaker manufacturing and other industries. On the flipside, household loans saw deterioration with GIL ratio at 1.06% (+17bps) post moratorium. During the month, system loan impairments reserve increased 5% MoM as banks continued to build-up loan loss reserves, which led to a loan loss coverage (LLC) of 107.4% (Oct 20: 109.6%, Nov 19: 82.1%). (refer to Table 6-7 for breakdown of system impaired loans)

November 2020 total deposits maintained a +4.4% YoY growth from October 2020, largely kept by the 7.1% YoY increase in deposits from individuals. In this regard, CASA growth remains healthy (+23% YoY) as depositors preferredhigher liquidity in the current climate. Meanwhile, fixed deposits were less favoured (-3.1% YoY) in line with less attractive interest rates. All in, system LDR is still buoyant at 84.5% (Oct 20: 84.4%).At the meantime, system CET-1shed slightlyto 14.48% (-13bps) with abuild-up of loans loss reserves and some banks having declared dividends in the November results reporting quarter.

Maintain NEUTRAL on the sector. We have some reservations on asset quality while lumpy future impairments could further impairthe sector. This is also backed by the prolonged movement controls which could impede economic development and income growth. On top of this, we maintain our house-view that there would likely be no additional OPR cuts in the nearterm (currently at 1.75%). We are selective in narrowing down our picks, mainly focusing on the safer bets with stronger books to boot. RHBBANK (OP; TP: RM6.30) is preferred for its solid capital strength and reserves against its peers, while also commanding inexpensive valuations.

Source: Kenanga Research - 4 Jan 2021