Apr 2021 system loans rose 3.9% YoY but was stagnant from Mar 2021 as revenge spending could have moderated, possibly set back by theMuslim fasting month. Loan disbursements and repayments soared 60% YoY but came in slower MoM. Loan applications and approvals also flattened MoM despite the 92% YoY surge, mainly from homes and hire purchase. Meanwhile, overall system gross impaired loan (GIL) ratiocontinuedto show marginal improvement for the third consecutive quarter at 1.57% (-1 bps MoM) but with delinquencies rising amongst working capital accounts.CASA growth is still high at 19% YoY suggesting the appetite for liquid cash is high.Overall loan demand could hit the brakes given the tightening of movement controls, especially for the month of June. Not to mention, Hari Raya festivities were also disrupted for the second year in a row. However, as vaccination roll-outs become more widespread, there could be less inherent risk foramore aggressive re opening of economic activity. That said, we are more bullish on the 2HCY21 period to achieve our industry targets of: (i) loans growth of 4-5%; and (ii) deposits growth of 3-4%.Maintain OVERWEIGHT on the Banking sector, with our Top Picks being: (i) MAYBANK (OP; TP: RM10.75) for its leading dividend yield and high dividend-to-ROE spread, and (ii) RHBBANK (OP; TP: RM6.25) for strong capital safety with its industry-leading CET-1 ratio. Apr 2021 saw tighter controls.YoY, system loans growth persisted at 3.9% mainly driven by household (+6.2%) and business loans (+0.6%) which have started to taper off. Recall that Apr 2020 would be the first full month under MCO 1.0. On a MoM-basis, total growth was stagnant as a result of a flattish bump in households (+0.4%), being offset by a flattish decline in business loans (-0.6%). While Mar 2021 enjoyed strong traction from revenge spending habits, such sentiment could have dissipated in Apr 2021 with the commencement of the fasting season mid-month. With that, total disbursements declined by 12% MoM with repayments down by 4.6% from slowing business activity. Sector-wise, most industries remained concurrently muted during the month, with mining and quarrying (+2.5%) being the most active.(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 a higher uptick in the 2HCY21 period. We opine that as vaccination efforts are rolled out, more relaxed and sustainable movement controls could allow economic activity to normalise and undisrupted towards recovery.

Loan applications seeminglytoppish (+92% YoY,-1% MoM).Apr 2021 loan applications were mostly employed for transport vehicles (+1,496% YoY) and residential properties (+451% YoY) financing. Non-residential properties also gained significantly (+398%). Business loan applications saw resistance (-10% YoY,-2% MoM) on the back of overall slower economic activity. Coincidently,loan approvals also trended similarly (+433% YoY; -9% MoM) with households being the main beneficiary (refer to Table 4-5 for breakdown of system loan applications).

Impairments still holding still. Total impairments in Apr 2021 tipped by 3% YoY, driven by failures in business loans (+7%) but softened by fewer impaired household loans (-17%). On the flipside, a -1% MoM recovery was posted thanks to business loans too, signifying that the economic climate could be changing for the better. Overall, GIL ratio came in slightly lower at 1.57% (-1 bps MoM) due to the abovementioned. Loan loss coverage for the month was relatively stable at 111.5% (Mar 2021: 111.5%, Apr 2020:86.1%)as banks continuedto provide for allowances against future uncertainties (refer to Table 6-7 for breakdown of system impaired loans).

Cash liquidity still in demand. Total deposits for Apr 2021 grew by 4.6% YoY but declined by 0.8% MoM, possibly due to better spendingin preparation of May 2021 festivities. Still, CASA-to-deposit ratio remained high at 30.4% (Mar 2021: 30.1%, Apr 2020: 26.7%) as the preferred accounts allocated for cash. As interest rates persistedto below, fixed deposit products werealso deemed as less attractive, hence undermining their demand (-5.7% YoY,-0.4% MoM). For the full year, we look at deposits growth to ease to3-4% with CASA mixto remain moderate at c.30%shouldconsumers becomeliberal with their funds to spend more in 2HCY20. Meanwhile,system LDR remainedrelatively stable at 83.9% (+0.6ppt MoM) while CET-1 ratio declined to 14.6% (+0.2ppt MoM) post-4QCY20 dividend payments by banks.

Maintain OVERWEIGHT on the banking sector.The reimplementation of a full lockdown does not come as a surprise given the rise in number of Covid-19 cases caused by excessive movement by the public. We foresee the months of May and June 2021 to only experience headwinds, especially the latter as a lockdown is being reimplemented. We suspect further extension to the two weeks period could follow, based on past trends and this would undoubtedly affect the demand for loans until movement restrictions are eased. That said, with vaccination drives along the way, we are more optimistic for a progressive economic recovery in 2HCY21 which could make up for the shortfalls expectedin the coming months. Given their economies of scale and stronger brand equity to consumers, we reckon that the larger banks would be among the first beneficiaries of the said economic recovery. With that, we highlight MAYBANK (OP; TP: RM10.75)for its industry-leading yield (7-8%) and high dividend-to-ROE spread amongst its peers. On the note of economic recovery, being the marketshare 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 of15.6%. This should enablegreater 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 Jun 2021