In December 2020, system loans expanded (+3.4% YoY, +0.3% MoM)frommore householdloans,butwithsome easingseengiven the sequential decline in new applications (-2% MoM) and tighter screening process impeding approvals (-7% MoM).Business loansremaintepidbut repaymentswerepicking up (+14% MoM)whichcould indicate some strengthbeingregained in cashflows.In terms of asset quality, gross impaired loan (GIL) ratio tipped to 1.57% (+4bps MoM)no thanks to shortfalls in both household and business loans, as struggling accounts emerge post-moratorium in September. CASAdepositsremained stable (-0.2% MoM)and loan-to-deposit ratio (LDR) registered at 84.0% (-5bps MoM).The coming monthsmayshed moreoflower qualityassets,butwedo not expect a complete shakedown in system loans. We are comforted byseveralindustry checks thatthe previously allocated targeted assistance exposure (15-20% of total loans)arestill sufficient, barringanytightening ofeconomic and movement restrictions. In lieu of the recent share price weakness stirred by greater market caution, we see buying opportunities in severalcounters asthecurrent economic conditions may not be as pressing as expected.Hence, we rerate: (i) ABMB (TP: RM2.70), (ii) AMBANK (TP: RM3.70),and (iii) MAYBANK (TP: RM8.60) from MP to OP. Meanwhile, we downgradeAFFIN (TP: RM1.50) from MP to UP. Following the above, we OVERWEIGHT the sector (from NEUTRAL) withRHBBANK(OP; TP: RM6.30)stillour favouritepickon the back of its strong capital portfolio.

December 2020 system loan picked up (+3.4% YoY) led by more household loans (+5.0% YoY) with a flattish increase in business loans (+1.0% YoY). MoM, there was a slight increment in total system loans (+0.3%), similarly thanks to household loans (+0.5% MoM) outpacing business loans which was stagnant. The rise in home financing could be attributed by borrowers looking to take advantage of the low interest rate environment with the slight recovery from Nov 2020 being indicative that consumer cash flows could still be well-managed in the current economic climate. Meanwhile, overall repayments were stable (+2.3% YoY) but this was supported by heavy repayments on securities related loans (+82.0% YoY) and working capital needs (+6.1% YoY) amidst the fall in credit card (-7.5% YoY), non residential properties (-29.9% YoY) and construction-related (-28.3% YoY). Dec 2020 repayment was 11.8% better MoM from Nov 2020 which was impeded by post-moratorium adjustments from debtors.(refer to Tables 1-3 for breakdown of system loans)

New loan applications grew 12% YoYfrom a25% spike in household loans beingmet by fewerapplications for business purposes (-5% YoY, -11% MoM). Manufacturing-related (-25% YoY, -40% MoM) businesses were affected by Covid-19 induced restraints tooperations. Although the wholesale and retail trade segment (-7% YoY) similarly suffered, a 19% MoM recovery in applications indicated that SMEs are hopeful for a return in consumer spending. Construction-related applications (-3% YoY, +8% MoM) are also picking up. On the flipside, while household loan demand showed significant interest YoY, there was a 3% decline MoM with new prospective homebuyers cautious in committing to large financing obligations in lieu of ongoing economic uncertainties. All in,loanapprovals saw a flattish sequential decline(-1% MoM) as lenders juggle to stimulate economic activity (+7% MoM business loan approvals) while practicing tighter screening for quality consumer borrowers (-7% MoM household loan approvals).(refer to Tables 4-5 for breakdown of system loan applications)

Asset qualitydips.Dec 2020 posted higher impairments (+7% YoY, +3% MoM) with an overall GIL ratio of 1.57% (+4bps MoM)from weakness in both household and business loans. We reckon the deterioration of household loans (GIL: 1.09%, +3bps MoM) is due to the lapse of the moratorium which was detrimental to the low-to-middle income consumer segment. Meanwhile, worsening business loans (GIL: 2.26%, +7bps MoM) could be attributed to the fall in manufacturing, agriculture as well as wholesale and retail trade. During the month, system loan impairments increased by 3% MoM as banks attempted to keep loan loss reserves adequate. Loan loss coverage ratio in Dec 2020 was stable at 107.5% (Nov 2020: 107.4%, Dec 2019: 81.4%).(refer to Table 6-7 for breakdown of system impaired loans)

More deposits were conserved, adding 4.5% YoY (+0.9% MoM) in Dec 2020. CASA mix was relatively healthy (29% of total deposits) butit saw a slight shedding (-0.2% MoM) as consumers likely picked up on discretionary spending during the year-end seasonality.The low interest rate environment also discouraged the flow into fixed deposits (-4.6% YoY,-0.8% MoM). All in, system LDR is still well sustained at 84.0% (Nov 2020: 84.5%) while system CET-1 remained stable at 14.58% (+10bps MoM).

Upgrade sector to OVERWEIGHT. The recent share price weakness could be due to fears ofgreaterpre-emptive provisioning to account for more assets being at risk, particularly stemmed by the enforcement of the recent MCO 2.0. At present, we are not overly concerned by this as our recent industry checks have indicated that the previously allocated target assistance exposure (i.e. 15-20% of total loans) for certain banks are still sufficient at the current economic climate with household loan applications still healthy. We had also gathered that the B40 segment only makes up a low-to-mid teens proportion of certain banks’ overall retail loans. As such, any concerns on the impact of insolvency should be underplayed. That said, this is barring any unforeseen extension or tightening of movement controls which could drag business activities further. We believe there could be further weakness in the market as investors scrutinize updates on movement controls and Covid- 19 cases, which could cause better buying opportunities to emerge. We keep our GGM-driven target prices unchanged for now, but rerate the following calls; (i) AFFIN (TP: RM1.50) from MP to UP; (ii) ABMB (TP: RM2.70) from MP to OP; (iii)AMBANK (TP: RM3.70) from MP to OP; and (iv) MAYBANK (TP: RM8.60) from MP to OP. Meanwhile, RHBBANK (OP; TP: RM6.30) remains as our favourite pick for its solid capital strength and reserves against its peers, while also commanding inexpensive valuations.

Source: Kenanga Research - 2 Feb 2021