June 2021 system loan gained a 3.4% YoY improvement but only 0.1% MoM, ashousehold loans sawits first MoM decline (-0.2%) since Apr 2020, likely stirred by the implementation of lockdown measures.Meanwhile, total business loans picked up by 0.5% MoM from better mining and manufacturing activities. Loan applications in the household sector also came off by 19% MoM withapprovals decreasing by18% MoM, which we opine should turn around when the lockdown is lifted. Overall system gross impaired loan (GIL) ratio continued to rise (1.62%, +3bps MoM) as the unforeseen spike in Covid-19 cases left a dent in business health-related and personal finances. Meanwhile, deposit balances remained strong (+4.3% YoY, +0.3% MoM) withCASA mix still toppish at 30.3%. At the moment, loans performance should still be hindered by stricter movement controls and a prolonged lull could also spell decline in asset health, but the six-month blanket moratorium could cushion this.That said, the progressive vaccination roll-outsshould allow for a more sustainable reopening of the economy and therefore spur greater demand for loans, hopefully by the latter half of 2HCY21. We maintain NEUTRAL on the banking sector for now as sentiment is lacking. However, we believe MAYBANK (OP; TP: RM10.65) is a strong pick for those needing to stayinvested. This is granted by their industry leading dividend yield and market leader position which could shelter against macro-economic headwinds

Lockdown likely affectedJune 2021. YoY, system loans expanded by 3.4% backed by household loans (+5.2%) as consumers spent more on private vehicles and properties. Meanwhile, business loans only rose by 0.8% amidst restraints in the overall operating landscape. MoM, total loans growth was almost stagnant at 0.1%as household loans saw its first MoM decline in Apr 2020. This is likely due to the implementation of full lockdown measures with even tighter movement restrictions and activities. On the flipside, the 0.5% growth in business loans supported the month, arising from more cash needed to fund mining and manufacturing (likely technology-based) activities. With regards to overall loans disbursement, there was a MoM dip of 3.3% while repayments came at -1.9%, both owing to softer number registered by households(refer to Table 1-3 for breakdown of system loans).At the moment, we maintain our CY21 system loans growth expectationat3-4% as immediatestruggles could be offsetcloser to the year-end as vaccination efforts allow for a wider scale reopening of the economy and loosening of movement controls. That said, we are cautious that any hiccups on this front and a prolonged economic lull could damage household income.

Loan applications have also taken a hit (-1% YoY, -12% MoM). Coinciding with the abovementioned lockdown, households are less able to apply for loans, with movement restrictions likely postponing the purchase of transport vehicles (-49% MoM)and residential properties (-18%). Meanwhile, the total application for business loans remained stagnant as businesses have limited operating capacity and are likely undertaking loans only for working capital purposes. Subsequently, total loan approvals were flattish YoY but decline 8% MoM (refer to Table 4-5 for breakdown of system loan applications).

Impairments continued to heighten. In June 2021, total impairments soared by 15% YoY, completely led by business loans (+17%) while household loans provided some buffer (-2%). On a MoM-basis, both household loans and business loans saw greater impairments by 6% and 2%, respectively. The lockdown measures implemented likely did not help these accounts fromdelinquency. In GIL terms, this led to theoverall sector arriving at 1.62% (+3 bps MoM). That said, the loan loss coverage ratio for the month remained relatively stable at 111.8% (May 2021: 109.9%, June 2020: 92.9%) as banks continued to be guarded in anticiaption of further provisions needed (refer to Table 6-7 for breakdown of system impaired loans).

CASA slightly easing. June 2021 deposits increased by 4.3% YoY but was somewhat stagnant from May 2021 (+0.3% MoM). However, the industry’s CASA-to-deposit mix also experienced a MoM decline, very slightly to 30.3% (May 2021: 30.4%). While this could be blamed on the lockdown affecting consumers’ propensity to save, it could appear that consumers are allocating more cash to non-traditional deposit accounts which might yield better returns. For CY21, we anticipate deposits growth to ease to 3-4% with a CASA mix of c.30% as withdrawals cum spending could pick up aggressively as the economy reopens. Meanwhile, system LDR is relatively unchanged at 86.6% with banks keeping a stable CET-1 ratio of 14.3% (+1 bps MoM) as they withhold dividend payments for the time being.

Maintain NEUTRAL on the banking sector. As expected, the full lockdown had further impeded the consumers’ability to spend and this could reflect poorly in the banks’ books. With the six-month opt-in blanket moratorium (effective 7 Jul 2021) being introduced, affected businesses have more time to attempt staying afloat but this would lead to some modification losses by the banks. That said, most banks agree that the impact from modification losses this time around should be much less severe as the 2020 episode was granted on an automatic basis and financing terms are more flexible this time around. Still, the prospects of the banking sector will still be very much a reflection of the economy and any hurdles in achieving vaccination targets could be less favourable to the sentiment of the sector. For investors still seeking a position, we continue to advocate MAYBANK (OP; TP: RM10.65). 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 fairly within the industry average of c.2% which indicates the bank has sound asset quality measures despite being the market leader in domestic financing share.

Source: Kenanga Research - 2 Aug 2021