In February 2021, system loans grew 3.7% YoY but plateaued at +0.1% MoM, mainly derived from household loans. The flattening of loan demand could be due to the implementation of MCO 2.0 coinciding with a muted CNY 2021. Loan disbursements and repayments were in the red, possibly being withheld by the above. At the same time, new loan applications (-15% YoY) and approvals (- 18% YoY) continued to diminish from newly injected uncertainties with fear of prolonged movement restrictions. On the flipside, overall system gross impaired loan (GIL) ratio marginally recovered to 1.59% (-1bps MoM), thanks to lower delinquencies amongst the households. CASA deposits still made up c.30% of total deposits given the lack of spending opportunities during the month. Correspondingly, February’s loan-to-deposit ratio (LDR) dipped to 84.1% (-38 bps MoM). Despite the hiccups seen from the short-term measures to curb the pandemic, we are still optimistic on the medium-term recovery prospects of the banking sector, underpinned by strong economic rebound with vaccination efforts along the way. Additionally, we expect impairments during the year to be less damaging backed by heavy frontloading of provisions during the 4QCY20 period. We also believe it is unlikely that further OPR cuts would be implemented, with our house-view that we would remain at 1.75% throughout the year. Any rate hikes would be viewed positively. Our favourite stocks are: (i) MAYBANK (OP; TP: RM9.10) for its dividend yield potential and entrenched market leading position, and (ii) RHBBANK (OP; TP: RM6.40) for its industry-leading CET-1 reserves which provides strong capital safety in the event further tightening is needed. Maintain OVERWEIGHT on the Banking sector.

February 2021 approaching a speed bump, as system loans growth posted a 3.7% YoY increase but continued to come in flattish MoM (+0.1%). Household loans persist as the main driver (+5.1% YoY) but registered an almost stagnant performance (+0.1% MoM) as compared to Jan 2021 likely owing to the implementation of MCO 2.0 which also inhibited CNY 2021 celebrations. Business loans also saw the same 0.1% MoM growth. Loan disbursements continued to deteriorate (-10.3% MoM), indicating moderate levels of over-borrowing. Possibly due to cashflows being hindered by the above, overall repayments suffered (-5.3% MoM) in both household (-6.7% MoM) and business (-4.8% MoM) accounts. Sector-wise, only utilities (electricity, gas and water supply) saw strong recovery in repayments (+99.9% MoM) while all other segments were affected by the softening of the economy (refer to Tables 1-3 for breakdown of system loans).

Fewer loan applications were registered (-15% YoY, -12% MoM). While there is strong demand for household loans to finance residential properties (+2% YoY), the steep MoM decline of 21% could be caused by the same factors mentioned above. Lower overall business loan applications (-27% YoY) is still hard pressed compared against a pre-Covid period (Feb 2020) but interestingly came in almost stagnant compared to Jan 2021. In tandem with ongoing tight credit control procedures, loans approval continued to contract (-18% YoY, -15% MoM). We opine that lenders will remain cautious as long as immediate risk to further economic disruption exists. In Feb 2021, approved household loans fell by 9% MoM while business loans fell by 23% MoM (refer to Tables 4-5 for breakdown of system loan applications).

Impairments present but could be moderating. Feb 2021 saw greater impairments by 5% YoY owing to business loans (+7% YoY) but was eased by better household loans (-6% YoY). Loan defaults were mainly attributed to poorer performance by the mining, retails and logistics and communications sectors. Overall, GIL reduced slightly to 1.59% (-1bps MoM) but this could be cushioned by extensions in assisted repayment programs to affected households until Jun 2021. Loan loss coverage ratio in Feb 2021 still appears adequate at 107.4% (Jan 2021: 106.0%, Feb 2020: 80.0%). (refer to Table 6-7 for breakdown of system impaired loans)

Cash is still preferred. Total deposits for Feb 2021 grew by 5.0% YoY, 0.5% MoM with CASA surging 24.8% YoY as depositors grow cautious on uncertainties brought by a potentially prolonged MCO 2.0. The low interest rate environment also gives less incentive for money to be kept in fixed deposits (-5.4% YoY, +0.5% MoM). System LDR is still well sustained at 84.1% (Jan 2021: 84.5%) while system CET-1 stayed closely at 15.3% (-10 bps MoM) with most banks announcing some form of dividends.

Maintain OVERWEIGHT on the banking sector. While near-term prospects appear dim, we believe sentiment would encounter a knee-jerk effect when decent economic recovery is underway. The rolling out of vaccination efforts would ultimately translate to less restrictive movement controls progressing until we reach total free movement. Additionally, we do not expect further OPR cuts for the year but welcome any hikes as it would enable better pricing opportunities for banks and also boost sentiment. Additionally, we do not anticipate further provisioning to be worrisome given most banks have frontloaded their books during 4QCY20. In terms of stock picks, we like MAYBANK (OP; TP: RM9.10) for its industry-leading yield (7-8%) and high dividend-toROE spread amongst its peers. On the note of economic recovery, being the market share leader in domestic loans, MAYBANK could be poised to experience accelerated loans growth given its brand equity and outreach. Meanwhile, we also like RHBBANK (OP; TP: RM6.40) for its leading CET-1 ratio of 16.2%. This should enable enables greater allowance to implement capital management strategies. Additionally, RHBBANK offers the next best dividend returns of 4-5% amongst the rest of its conventional peers (2-4%).

Source: Kenanga Research - 1 Apr 2021