May 2021 system loan improved3.9% YoYand0.3% MoM,with the pressures from the MCO 3.0 likely to have only kicked in during the latter half of the month. This could have also led to MoM decline in loan disbursements and repayments as economic activitieshit the brakes. Loan applications were mainly supported by household demand (from properties and transport vehicles) asbusiness loan applications were a mixed bag given the varying measures across industries. Overall system gross impaired loan (GIL) ratio saw an uptick at 1.59% (+2bps MoM) as certain accounts failed to recoverin a prolongrdweak economic environment. Meanwhile, deposits still performedfavourably (+5.2% YoY, +0.4% MoM) with CASA-to-deposit ratio maintaining its all-time high (30.4%). The coming months could remain challenging as dailyCovid-19 caseshave been consistently high despite lockdown measures whichcould hinder economic recovery efforts. That said, we opine that vaccination efforts should result in a turn for the better but this could only be realised in the latter half of 2HCY21. Our industry targetsare 3-4% YoY growth for both loans and deposits. Staying cautious, we maintain our NEUTRAL view on the banking sector with MAYBANK (OP; TP: RM10.65) as our preferred pick for its industry leading dividend yield and market leader position which could shelter against macro-economic headwinds.

May 2021 shakenby MCO 3.0. YoY, system loans maintained a 3.9% growth mainly thanks to household loans (+6.1%) rising with greater private consumption while business loans ticked up by 0.9% as business environment remained soft. Recall that in May 2020, the nation moved to a conditional MCO until 9 June with restrictions eased. MoM, total growth was flattish at 0.3% but was led by better business loans (+0.4%) driven by the manufacturing sector and retail sector; although we believe the latter could have not accounted for the extension of the implemented lockdown. Meanwhile, household loans only inched up 0.2%. Subsequently, loans disbursement declined by 1.8% MoM with repayments also taking a hit by 4.5% MoM as the said lockdown impeded economic activity. Sector-wise, the mining and quarrying industry saw the biggest decrease by 6.9% but manufacturing (+1.0%) continued to stay relevant, albeit with restricted operating capacity (refer to Table 1-3 for breakdown of system loans).Following the recent blanket moratorium announcement, we toned down our loans growth expectation to 3-4% (from 4-5%)for CY21 premised on a prolonged lull in economic activity impactingpersonal spending. We opine that as vaccination efforts progresses, more relaxed and sustainable movement controls could allow economic activity to normalise and move towards recovery, but this might only materialise in 4QCY21.

Loans applicationsnormalising(+64% YoY, -15% MoM). May 2021 loan applications improved YoY mainly from pent-up demand for transport vehicles (+169%), residential properties (+216%) and non-residential properties (+201%) financing. However, business loan applications was still weaker (-6% YoY, -15% MoM) as economic activity continued to be muted. This tied with loan approval (+80% YoY, -8% MoM) which mainly saw support from household loans (refer to Table 4-5 for breakdown of system loan applications).

Impairments on the rise. In May 2021, total impairments rose 7% YoY, attributed tobusiness loans (+10%) being left distraught by the troubled economic landscape. Meanwhile, household loans were better off at -16% YoY. On a MoM-basis, household loans were flattish while business loans creptup by 2% as past movement restrictions did not help business activity. This translated to the month’s GIL ratio extending to 1.59% (+2 bps MoM). That said, the loan loss coverage ratio for the month remained relatively stable at 109.9% (Apr 2021: 111.5%, May 2020: 89.0%) as banks remained prudent with their provisioning needs (refer to Table 6-7 for breakdown of system impaired loans).

Cash much preferred. May 2021 deposits rose by 5.2% YoY and was stable as compared to Apr 2021 (+0.4% MoM). Possibly due to the lockdown and movement restrictions, consumers had fewer opportunities to spend and hence kept cash idle. Due to this, CASAto-deposit ratio stayed elevated at 30.4% (Apr 2021: 30.4%, May 2020: 27.4%). For the full year, we look at deposits growth to ease to 3-4% with CASA mix to remain moderate atc.30%as we anticipate greater withdrawal of funds in2HCY20coinciding with an economic reopening enabled by national vaccination programs. Meanwhile, system LDR remainedrelatively stable at 83.8% (-0.1ppt MoM) while CET-1 ratio declined to 14.3% (-0.3ppt MoM) post-4QCY20 dividend payments by banks.

Maintain NEUTRALon the banking sector. The extension of the full lockdown was anticipated given the persistence of Covid-19 cases but comes as a blow to the banks. The newly announced six-month blanket moratorium (effective 7 Jul 2021) should help to cushion the financial difficulties of affected individuals and businesses but could come at the expense of some modification losses on the banks’ part. Meanwhile, economic growth could remain hindered should tight controls be upheld, delaying the prospects for recovery and could trigger the need for further provisioning by the banks. That said, we orate buying-on-weakness and highlight MAYBANK (OP; TP: RM10.65) as our favourite pick in the sector. Its industry-leading dividend yield (7-8%) and dividend-to-ROE provide sizeable buffers for investors seeking a long-term play amidst ongoing macroeconomic uncertainties. Additionally, its GIL ratio is still fairly within the industry average of c.2.2% which indicates the bank has sound asset quality measures despite being the market leader (c.30% financing share) between the 10 banks within our coverage. Further, its high fixed-rate loan mix (c.28%) is offset by its high CASA-to-deposit ratio (c. 40%) to cushion OPR fluctuations in the near-term.

Source: Kenanga Research - 1 Jul 2021