Mar2021 system loansgained3.9% YoY with better MoM growth of 0.7% (ascompared to 0.1% in Feb), possibly lifted by revenge spending from MCO 2.0’s lulland more relaxedmovementrestrictions.Loan disbursements and repayments spiked by over 20%bothMoM and YoY, atall-time-highs. New loanapplications also soared in March 2021, rising 44% YoYand59% MoM,with similarly higher loan approvals to boot, withgrowth mostly coming from households. Meanwhile, overall system gross impaired loan (GIL) ratio continued to show marginal improvement at1.58% (-1bps MoM) with better performing business loans balancing out slightly higher delinquencies amongst household accounts. Despite the higher total system loans portfolio for the month, CASA deposits remained toppish at c.30% indicating that cash liquidity is still highly sought after.In line with the inflow of loans, loan-to-deposit ratio (LDR) dipped to 86.8% (-8bps MoM). Theseuptickscould be indicative of greater appetite in both consumer and corporatesectorsthat is much needed to spur sustainable economic recovery. While we do not foresee April 2021 to perform as poorly astheJan-Febperiod, risks could arise from the rise of Covid-19 cases which could trigger stricterMCOsand possiblydisruptingHariRaya festivities. That said,we believeamore meaningful recovery could be seen in2HCY21as vaccination roll-outs become more widespread.Maintain OVERWEIGHT on the Banking sector, with our Top Picks being: (i) MAYBANK (OP; TP: RM10.60) for its leading dividend yieldandhighdividend-to-ROE spread, and (ii) RHBBANK (OP; TP: RM6.25) for strong capital safety with its industry-leading CET-1 ratio.

March 2021 lifted by revenge spending.YoY, system loans growth expanded by 3.9% with improvement in both household (+5.7%) and business (+1.4%) loans. On MoM-basis, total growth came in at 0.7% withgreater strength coming from business loans (+1.3%),pickingup from the weak Feb 2021 business landscape amidst the MCO 2.0. With the livelier economic environment, loan disbursements surged 32% MoM with high level of loan repayments to match (+22.6% MoM) where business loans outperformed household loans in terms of growth. Sector-wise, most industries displayed stronger abilities to meet repayments with the exception of utilities (electricity, gas and water supply) declining by 25% MoM but this could be due to normalising payment trends, after registering lumpy numbers in Feb 2021 (refer to Table 1-3 for breakdown of system loans).

Between the banks within our coverage, we are anticipating loans growth of 4-5% for CY21 premised on ahigher uptick in the 2HCY21 period. We opine that as vaccination efforts rollout, more relaxed and sustainable movement controls could allow economic activity to normalise and remain undisrupted towards recovering itself. This coincides with our in-house CY21 GDP forecast of 6.5%.

Hungry for cash, loan applications swelled (+44% YoY, +59% MoM). Loan applications for the month was strong for household loans (+66% MoM) on strongdemandforboth residential (+76% MoM) and non-residential (+52% MoM) properties financing. Business loan applications also stood tall (+47% MoM) with the highest uptickscomingfrom mining, manufacturing and retails,allwhich had experienced steady declines over the past few months. Coinciding with the spike in volume, loan approvals rebounded (+34% YoY,+52% MoM)after continuously contracting for five consecutive months due to tighter credit screening procedures. In Mar 2021, approved household loans rose by 39% MoM whilebusiness loans soared by 74% MoM (refer to Table 4-5 for breakdown of system loan applications).

Stagnant impairments amidst higher loan base. Total impairments posted in Mar 2021 increased by 4% YoY owing to lower quality business books (+7%) but moderated by fewer impaired household loans (-15%). Similarly on MoM-basis, although flattish, this was due to poorer business loans (+1%) against better household loans (-6%). Overall, GIL ratio reduced slightly to 1.58% (-1bps MoM) due to the higher abovementioned loan base. Loan loss coverage ratio in Mar 2021 inchedupfurther to 111.8% (Feb2021: 107.4%, Mar 2020: 81.5%) as banks continuedto provide for allowances against future uncertainties (refer to Table 6-7 for breakdown of system impaired loans).

Cash mix buoyant. Total deposits for Mar 2021 grewby 6.2% YoY, 1.4% MoM with CASA-to-deposit ratio keeping at 32.1% (Feb 2021: 31.9%, Mar 2020: 28.1%). Although system loans are creeping up, consumer preference to keep cash accessible is indicative that depositors are still wary of further shocks if the Covid-19 situation worsens. Also, as the interest rate environment remains low, depositors could be less encouraged to consider fixed deposit products (-5.8% YoY,-1.7% MoM). For the full year, welook at deposits growth toease to c.4% with a more moderate CASA mix of c.30% should consumers become liberal with their safety boxes tospend morein 2HCY20. Meanwhile,System LDR remained relatively stable at 86.8% (-0.8ppt MoM) while CET-1 ratio declined to 14.9% (-0.4ppt MoM) post-4QCY20 dividend payments by banks.

Maintain OVERWEIGHT on the banking sector.The economy appears to be making up for lost opportunities from the previous months, but we are cautious that with rising reported Covid-19 cases, the government could have no choice but to once again implement stricter movement controls to curb the pandemic. That said, we are counting on economic stabilisation and growth to kick in more meaningfully in 2HCY21 when vaccination roll-outs are more successful. We do not anticipate any further OPR cuts for now and that banks will ease credit cost exposure for the year, having front loaded their books in 4QCY20.In terms of stock selections, we like MAYBANK (OP; TP: RM10.60) for its industry-leading yield (7-8%) and high dividend-to-ROE 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: RM6.25) for its leading CET-1 ratio of 16.2%. This should enable 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 - 3 May 2021